10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2009

Commission File Number 001-32968

HAMPTON ROADS BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

Virginia	54-2053718
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
999 Waterside Dr., Suite 200 Norfolk, Virginia	23510
(Address of principal executive offices)	(Zip Code)

(757) 217-1000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, par value $0.625 per share	The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

State the aggregate market value of the voting and non-voting common equity held by nonaffiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $145,910,903

The number of shares outstanding of the issuer’s Common Stock as of March 25, 2010 was 22,153,594 shares, par value $0.625 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report to Shareholders for the year ended December 31, 2009 are incorporated by reference into Part II, which excerpts from the Annual Report are filed herewith as Exhibit 13.1.

Portions of the Proxy Statement for the 2010 annual shareholders’ meeting are incorporated by reference into Part III.

Hampton Roads, Bankshares, Inc.

Form 10-K Annual Report

For the Year Ended December 31, 2009

Table of Contents

		Page
Part I
Item 1.	Business	1
Item 1A.	Risk Factors	16
Item 1B.	Unresolved Staff Comments	31
Item 2.	Properties	31
Item 3.	Legal Proceedings	33
Item 4.	Removed and Reserved	33
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	33
Item 6.	Selected Financial Data	37
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 8.	Financial Statements and Supplementary Data	37
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	38
Item 9A.	Controls and Procedures	38
Item 9B.	Other Information	40
Part III
Item 10.	Directors, Executive Officers, and Corporate Governance	40
Item 11.	Executive Compensation	41
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	41
Item 13.	Certain Relationships and Related Transactions, and Director Independence	41
Item 14.	Principal Accounting Fees and Services	41
Part IV
Item 15.	Exhibits and Financial Statement Schedules	41
	Signatures	43

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PART 1

ITEM 1 – BUSINESS

Overview

Unless indicated otherwise, the terms “we,” “us,” or “our” refer to Hampton Roads Bankshares, Inc. and its consolidated subsidiaries.

Hampton Roads Bankshares, Inc. (the “Company”), a Virginia corporation, was incorporated under the laws of the Commonwealth of Virginia on February 28, 2001, primarily to serve as a holding company for Bank of Hampton Roads (“BOHR”). On July 1, 2001, all BOHR Common Stock, par value $0.625 per share, converted into Hampton Roads Bankshares, Inc. Common Stock, par value $0.625 per share (the “Common Stock”), on a share for share exchange basis, making BOHR a wholly-owned subsidiary of the Company. In January 2004, we formed Hampton Roads Investments, Inc., a wholly-owned subsidiary, to provide securities, brokerage, and investment advisory services. This subsidiary is currently inactive.

On June 1, 2008, pursuant to the terms of the Agreement and Plan of Merger dated as of January 8, 2008 by and between the Company and Shore Financial Corporation (“SFC”), the Company acquired via merger all of the outstanding shares of SFC making Shore Bank (“Shore”), a wholly owned subsidiary of the Company. Shore has a wholly owned subsidiary, Shore Investments Inc.

On December 31, 2008, pursuant to the terms of the Agreement and Plan of Merger dated as of September 23, 2008 by and between the Company and Gateway Financial Holdings, Inc. (“GFH”), the Company acquired via merger all of the outstanding shares of GFH making Gateway Bank & Trust Co. (“Gateway”) a wholly-owned subsidiary of the Company. On May 11, 2009, Gateway was dissolved and merged into BOHR.

BOHR is a Virginia state-chartered commercial bank with 28 full-service offices in the Hampton Roads region of southeastern Virginia, including eleven offices in the city of Chesapeake, five offices in the city of Norfolk, ten offices in the city of Virginia Beach, and two offices in the city of Suffolk. In addition, BOHR has 24 full-service offices located in the Northeastern, Southeastern, and Research Triangle regions of North Carolina and in Richmond, Virginia that do business as Gateway. Through its acquisition of Gateway, the bank owns four wholly-owned operating subsidiaries. Gateway Insurance Services, Inc., an insurance agency with offices in Edenton, Hertford, Elizabeth City, Plymouth, Moyock, and Kitty Hawk, North Carolina and the Hampton Roads area of Virginia, sells insurance products to businesses and individuals. Gateway Investment Services, Inc. assists Gateway customers in their securities brokerage activities through an arrangement with an unaffiliated broker-dealer. As prescribed by this arrangement, Gateway Investment Services earns revenue through a commission sharing arrangement with the unaffiliated broker-dealer. Gateway Bank Mortgage, Inc. provides mortgage banking services with products that are sold on the secondary market. Gateway Title Agency, Inc. engages in title insurance and settlement services for real estate transactions. BOHR commenced operations in 1987.

Shore is a Virginia state-chartered commercial bank with eight full-service offices and an investment center located on the Delmarva Peninsula, otherwise known as the Eastern Shore. Shore operates on the Virginia and Maryland portions of the Eastern Shore, including the counties of Accomack and Northampton in Virginia and the Pocomoke City and Salisbury market areas in Maryland. Shore’s subsidiary, Shore Investments, Inc., provides non-deposit investment products including stocks, bonds, mutual funds, and insurance products. Shore Investments has an investment in a Virginia title insurance agency that enables Shore to offer title insurance policies to its real estate loan customers. Shore commenced operations in 1961.

BOHR and Shore may be collectively referred to as the “Banks” throughout this document.

Our principal executive office is located at 999 Waterside Drive, Suite 200, Norfolk, VA 23510 and our telephone number is (757) 217-1000. Our Common Stock trades on the NASDAQ Global Select Market under the symbol “HMPR.”

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Business

Principal Products or Services

We engage in a general community and commercial banking business, targeting the banking needs of individuals and small- to medium-sized businesses in our primary service areas which include South Hampton Roads, Virginia, the Northeastern, Southeastern, and Research Triangle regions of North Carolina, the Eastern Shore of Virginia and Maryland, and Richmond, Virginia. Our principal business is to attract deposits and to loan to the community or to invest those deposits on profitable terms. We offer traditional loan and deposit banking services, as well as telephone banking, Internet banking, remote deposit capture, and debit cards. We accept both commercial and consumer deposits. These deposits are in varied forms of both demand and time accounts including checking accounts, interest checking, money market accounts, savings accounts, certificates of deposit, and IRA accounts. Additionally, we offer a network of seventy-two ATM machines to support our customers.

We are involved in the construction and real estate lending markets and extend both personal and commercial credit. Our loans consist of varying terms and can be secured or unsecured. Loans to individuals are for personal, household, and family purposes. Loans to businesses are for such purposes as working capital, plant expansion, and equipment purchases. Real estate loans are made for both residential and commercial properties. Loan revenues, in the form of interest income including fees, represented 83%, 84%, and 86% of our total consolidated operating revenues for the years ended December 31, 2009, 2008, and 2007, respectively.

Lending Activities

General. We offer a full range of commercial, real estate, and consumer lending products and services, described in further detail below. Our loan portfolio is comprised of the following categories: commercial, construction, real estate-commercial mortgage, real estate-residential mortgage, and installment loans to individuals. Our primary lending objective is to meet business and consumer needs in our market areas while maintaining our standards of profitability and credit quality and enhancing client relationships. All lending decisions are based upon a thorough evaluation of the financial strength and credit history of the borrower and the quality and value of the collateral securing the loan. With few exceptions, personal guarantees are required on all loans.

Commercial loans. We make commercial loans to qualified businesses in our market areas. Commercial loans are loans to businesses which are typically not collateralized by real estate. Generally, the purpose of commercial loans is for the financing of accounts receivable, inventory, or equipment and machinery. Repayment of commercial loans may be more substantially dependent upon the success of the business itself, and therefore, must be monitored more frequently. In order to reduce our risk, the Banks require regular updates of the business’s financial condition, as well as that of the guarantors, and regularly monitor accounts receivable and payable of such businesses when deemed necessary.

Construction loans. We make construction and development loans to individuals and businesses for the purpose of construction of single family residential properties, multi-family properties, and commercial projects as well as the development of residential neighborhoods and commercial office parks. BOHR has been active in construction and development lending in its market since its inception. To manage risk on construction and development loans, the Banks fund these loans on an “as-completed” basis with experienced bank representatives inspecting the properties before funding. Larger, more complicated projects require independent inspections by an architectural or engineering firm approved by the Banks prior to funding. Additionally, risk is being managed in the construction and development portfolio by limiting additional lending for speculative building of both residential and commercial properties, based upon the borrower’s history with the Banks, financial strength, and the loan-to-value ratio of such speculative property. The Banks rarely exceed 80% loan-to-value on any new construction loan. An individual who borrows with the purpose of building a personal residence must provide evidence of a permanent mortgage as well as a contract with a licensed builder before the closing of the loan.

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Real estate-commercial mortgage. The Banks make commercial mortgage loans for the purchase and re-financing of owner occupied commercial properties as well as non-owner occupied income producing properties. These loans are secured by various types of commercial real estate including office, retail, warehouse, industrial, storage facilities, and other non-residential types of properties. Commercial mortgage loans typically have maturities or are callable from one to five years. Underwriting for all commercial mortgages involves an examination of debt service coverage ratios, the borrower’s creditworthiness and past credit history, and the guarantor’s personal financial condition. Underwriting for non-owner occupied commercial mortgages also involves evaluation of the current leases and financial strength of the tenants.

Real estate-residential mortgage. We offer a wide range of residential mortgage loans through our Banks and our subsidiary, Gateway Bank Mortgage, Inc. Our residential mortgage portfolio held by the Banks includes first and junior lien mortgage loans, home equity lines of credit, and other term loans secured by first and junior lien mortgages. Residential mortgage loans have historically been lower risk loans in the Banks’ portfolios due to the ease in which the value of the collateral is ascertained, although the risks involved with these loans has been on the rise lately due to falling home prices and high unemployment in our markets. First mortgage loans are generally made for the purchase of permanent residences, second homes, or residential investment property. Second mortgages and home equity loans are generally for personal, family, and household purposes such as home improvements, major purchases, education, and other personal needs. Mortgages which are secured by a borrower’s primary residence are made on the basis of the borrower’s ability to repay the loan from his or her regular income as well as the general creditworthiness of the borrower. Mortgages secured by residential investment property are made based upon the same guidelines as well as the borrower’s ability to cover any cash flow shortages during the marketing of such property for rent.

Installment loans to individuals. Installment loans to individuals are made on a regular basis for personal, family, and general household purposes. More specifically, we make automobile loans, home improvement loans, loans for vacations, and debt consolidation loans. Due to low interest rates offered by auto dealership financial programs, this segment of the loan portfolio has declined in recent years. While consumer financing may entail greater collateral risk than real estate financing on a per loan basis, the relatively small principal balances of each loan mitigates the risk associated with this segment of the portfolio.

Deposits

We offer a broad range of interest-bearing and non-interest-bearing deposit accounts, including commercial and retail checking accounts, money market accounts, individual retirement accounts, regular interest-bearing savings accounts, and certificates of deposit with a range of maturity date options. The primary sources of deposits are small- and medium-sized businesses and individuals within our target markets. Additionally, we entered the national certificate of deposit market and the brokered certificate of deposit market during 2007.

The Company has opted to participate in the Federal Deposit Insurance Corporation’s (“FDIC”) Transaction Account Guarantee Program (“TAGP”), whereby the FDIC will provide deposit insurance coverage for the full amount in all of the banks’ customers’ noninterest-bearing deposit accounts through December 31, 2010. There is a possibility that the TAGP may be extended for an additional 12 months if the FDIC determines that continuing economic conditions warrant such an extension. This includes personal and business noninterest-bearing checking accounts, low-interest NOW accounts, official items, and certain types of attorney trust accounts with interest rates of 0.25% or less. The TAGP insurance coverage is in addition to the increased coverage provided by the Emergency Economic Stabilization Act of 2008, which temporarily raises the basic FDIC deposit insurance coverage limits to $250,000 through December 31, 2013, from the normal coverage limit of $100,000.

Telephone and Internet Banking

We believe there is a strong demand within our markets for telephone banking and Internet banking. These services allow both commercial and retail customers to access detailed account information and execute a wide variety of banking transactions, including balance transfers and bill payment. We believe these services are particularly attractive to our customers, as these services enable them to conduct their banking business and monitor their accounts at any time. Telephone and Internet banking assist us in attracting and retaining customers and encourage our existing customers to consider us for all of their banking and financial needs.

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Automatic Teller Machines

We have a network of seventy-two ATMs throughout our markets, which are accessible by the customers of our subsidiary banks.

Other Products and Services

We offer other banking-related specialized products and services to our customers, such as travelers’ checks, coin counters, wire services, and safe deposit box services. Additionally, we offer our commercial customers various cash management products including remote deposit capture which allows them to make electronic check deposits from their offices. We issue letters of credit and standby letters of credit, most of which are related to real estate construction loans, for some of our commercial customers. We have not engaged in any securitizations of loans.

The Company also offers other services that complement the core financial services offered by the Banks. Three of our wholly-owned subsidiaries, Hampton Roads Investments Inc., Shore Investments Inc., and Gateway Investment Services, Inc., provide securities, brokerage, and investment advisory services and are capable of handling many aspects of wealth management including stocks, bonds, annuities, mutual funds, and financial consultation. Through our subsidiary, Gateway Title Agency, Inc., we offer title insurance to our real estate loan customers. The Company also provides insurance products to businesses and individuals through its subsidiary insurance agency, Gateway Insurance Services, Inc. Additionally, Gateway Bank Mortgage, Inc. engages in originating and processing mortgage loans.

Competition

The financial services industry remains highly competitive and is constantly evolving. We experience strong competition with competitors, some of which are not subject to the same degree of regulation that is imposed on us. Many of them have broader geographic markets and substantially greater resources, and therefore, can offer more diversified products and services.

In our market areas, we compete with large national and regional financial institutions, savings banks, and other independent community banks, as well as credit unions, consumer finance companies, mortgage companies, loan production offices, and insurance companies. Many of these institutions have substantially greater assets and capital than we do. In many instances, these institutions have greater lending limits than we do. Competition for deposits and loans is affected by factors such as interest rates offered, the number and location of branches, types of products offered, and reputation of the institution. We believe that our pricing of products has remained competitive, but our historical success is primarily attributable to high quality service and community involvement.

Market

The Company’s market area includes Hampton Roads, including Chesapeake, Norfolk, Virginia Beach, Portsmouth, and Suffolk, Virginia; the Northeastern, Southeastern, and Research Triangle regions of North Carolina; the Eastern Shore of Virginia and Maryland; and Richmond, Virginia. This region has a diverse, well-rounded economy supported by a solid manufacturing base and a significant military presence. The Company has no significant concentrations to any one customer.

Government Supervision and Regulation

General

As a bank holding company, the Company is subject to regulation under the Bank Holding Company Act of 1956, as amended, and the examination and reporting requirements of the Board of Governors of the Federal Reserve System.

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Other federal and state laws govern the activities of our Banks, including the activities in which they may engage, the investments they make, the aggregate amount of loans they may grant to one borrower, and the dividends they may declare and pay to us. Our bank subsidiaries are also subject to various consumer and compliance laws. As Virginia state-chartered banks, BOHR and Shore are primarily subject to regulation, supervision, and examination by the Bureau of Financial Institutions of the Virginia State Corporation Commission (“Bureau of Financial Institutions”). In addition, we are regulated and supervised by the FDIC. We must furnish to the FDIC quarterly and annual reports containing detailed financial statements and schedules. All aspects of our operations, including reserves, loans, mortgages, capital, issuance of securities, payment of dividends, and establishment of branches are governed by these authorities. These authorities are able to impose penalties, initiate civil and administrative actions, and take further steps to prevent us from engaging in unsafe or unsound practices. In this regard, the Federal Reserve Board (“Federal Reserve”) has adopted capital adequacy requirements.

The following description summarizes the more significant federal and state laws applicable to us. To the extent that statutory or regulatory provisions are described, the description is qualified in its entirety by reference to that particular statutory or regulatory provision.

The Bank Holding Company Act

Under the Bank Holding Company Act, we are subject to periodic examination by the Federal Reserve and required to file periodic reports regarding our operations and any additional information that the Federal Reserve may require. Our activities at the bank holding company level are limited to:

• banking, managing, or controlling banks;

• furnishing services to or performing services for our subsidiaries; and

• engaging in other activities that the Federal Reserve has determined by regulation or order to be so closely related to banking as to be a proper incident to these activities.

Some of the activities that the Federal Reserve has determined by regulation to be closely related to the business of a bank holding company include making or servicing loans and specific types of leases, performing specific data processing services, and acting in some circumstances as a fiduciary, investment, or financial adviser.

With some limited exceptions, the Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:

• acquiring substantially all the assets of any bank; and

• acquiring direct or indirect ownership or control of any voting shares of any bank if after such acquisition it would own or control more than 5% of the voting shares of such bank (unless it already owns or controls the majority of such shares) or merging or consolidating with another bank holding company.

In addition, and subject to some exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with their regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is presumed to exist if a person acquires 10% or more, but less than 25%, of any class of voting securities and if the institution has registered securities under Section 12 of the Securities Exchange Act of 1934 or no other person owns a greater percentage of that class of voting securities immediately after the transaction. The regulations provide a procedure for challenging this rebuttable control presumption.

Payment of Dividends

The Company is a legal entity separate and distinct from the Banks and our subsidiaries. Substantially all of our cash revenues will result from dividends paid to us by our Banks and interest earned on short-term investments. Our Banks are subject to laws and regulations that limit the amount of dividends that they can pay. Under Virginia law, a bank may not declare a dividend in excess of its accumulated retained earnings. Additionally, our Banks may not declare a dividend, unless the dividend is approved by the Federal Reserve, if the total amount of all dividends,

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including the proposed dividend, declared by the bank in any calendar year exceeds the total of the bank’s retained net income of that year to date, combined with its retained net income of the two preceding years. Our Banks may not declare or pay any dividend if, after making the dividend, the bank would be “undercapitalized,” as defined in the banking regulations. Both the Company and BOHR are prevented from paying dividends until their financial condition improves.

The Federal Reserve and the Bureau of Financial Institutions have the general authority to limit the dividends paid by insured banks if the payment is deemed an unsafe and unsound practice. Both the Federal Reserve and the Bureau of Financial Institutions have indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsound and unsafe banking practice.

In addition, we are subject to certain regulatory requirements to maintain capital at or above regulatory minimums. These regulatory requirements regarding capital affect our dividend policies. Regulators have indicated that bank holding companies should generally pay dividends only if the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality, and overall financial condition.

The Company is also required to obtain the consent of the United States Department of the Treasury (the “Treasury”) to increase dividends on its Common Stock as long as we are participating in the Troubled Asset Relief Program (“TARP”). As of December 31, 2009, the Company was not allowed to pay any dividends without prior regulatory approval.

Insurance of Accounts, Assessments, and Regulation by the FDIC

The deposits of our bank subsidiaries are insured by the FDIC up to the limits set forth under applicable law and are subject to the deposit insurance assessments of the Bank Insurance Fund (“BIF”) of the FDIC.

The FDIC has implemented a risk-based deposit insurance assessment system under which the assessment rate for an insured institution may vary according to regulatory capital levels of the institution and other factors, including supervisory evaluations. In addition to being influenced by the risk profile of the particular depository institution, FDIC premiums are also influenced by the size of the FDIC insurance fund in relation to total deposits in FDIC insured banks. The FDIC has authority to impose special assessments.

In February 2006, The Federal Deposit Insurance Reform Act of 2005 and The Federal Deposit Insurance Reform Conforming Amendments Act of 2005 (collectively, “The Reform Act”) was signed into law. This legislation contained technical and conforming changes to implement deposit insurance reform, as well as a number of study and survey requirements.

The Reform Act provides for the following changes:

• Merging the BIF and the Savings Association Insurance Fund into a new fund, the Deposit Insurance Fund (“DIF”).

• Increasing the coverage limit for retirement accounts to $250,000 and indexing the coverage limit for retirement accounts to inflation as with the general deposit insurance coverage limit.

• Establishing a range of 1.15% to 1.50% within which the FDIC Board of Directors may set the Designated Reserve Ratio (“DRR”).

• Allowing the FDIC to manage the pace at which the DRR varies within this range.

• If the reserve ratio falls below 1.15%—or is expected to within 6 months—the FDIC must adopt a restoration plan that provides that the DIF will return to 1.15% generally within 5 years.

• If the reserve ratio exceeds 1.35%, the FDIC must generally dividend to DIF members half of the amount above the amount necessary to maintain the DIF at 1.35%, unless the FDIC Board, considering statutory factors, suspends the dividends.

• If the reserve ratio exceeds 1.50%, the FDIC must generally dividend to DIF members all amounts above the amount necessary to maintain the DIF at 1.50%.

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• Eliminating the restrictions on premium rates based on the DRR and granting the FDIC Board the discretion to price deposit insurance according to risk for all insured institutions regardless of the level of the reserve ratio.

• Granting a one-time initial assessment credit (of approximately $4.7 billion) to recognize institutions’ past contributions to the fund.

• Requiring the FDIC to conduct studies of three issues: (1) further potential changes to the deposit insurance system, (2) the appropriate deposit base in designating the reserve ratio, and (3) the Corporation’s contingent loss reserving methodology and accounting for losses.

• Requiring the Comptroller General to conduct studies of (1) federal bank regulators’ administration of the prompt corrective action program and recent changes to the FDIC deposit insurance system and (2) the organizational structure of the FDIC.

The FDIC is authorized to prohibit any insured institution from engaging in any activity that the FDIC determines by regulation or order to pose a serious threat to the DIF. Also, the FDIC may initiate enforcement actions against banks, after first giving the institution’s primary regulatory authority an opportunity to take such action. The FDIC may terminate the deposit insurance of any depository institution if it determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed in writing by the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If deposit insurance is terminated, the deposits at the institution at the time of termination, less subsequent withdrawals, shall continue to be insured for a period from six months to two years, as determined by the FDIC. We are unaware of any existing circumstances that could result in the termination of any of our bank subsidiaries’ deposit insurance.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 comprehensively revised the laws affecting corporate governance, accounting obligations, and corporate reporting for companies with equity or debt securities registered under the Securities Exchange Act of 1934, as amended. In particular, the Sarbanes-Oxley Act established: (1) new requirements for audit committees, including independence, expertise, and responsibilities; (2) new certification responsibilities for the Chief Executive Officer and Chief Financial Officer with respect to the Company’s financial statements; (3) new standards for auditors and regulation of audits; (4) increased disclosure and reporting obligations for reporting companies and their directors and executive officers; and (5) new and increased civil and criminal penalties for violation of the federal securities laws.

Emergency Economic Stabilization Act of 2008 (“EESA”)

In response to recent unprecedented market turmoil, the EESA was enacted on October 3, 2008. EESA authorizes the Secretary of Treasury (the “Secretary”) to purchase or guarantee up to $700 billion in troubled assets from financial institutions under the TARP. Pursuant to authority granted under EESA, the Secretary has created the TARP Capital Purchase Program (“TARP CPP” or “CPP”) under which the Treasury could invest up to $250 billion in senior preferred stock of U.S. banks and savings associations or their holding companies. Qualifying financial institutions issued senior preferred stock with a value equal to not less than 1% of risk-weighted assets and not more than the lesser of $25 billion or 3% of risk-weighted assets. The senior preferred stock pays dividends at the rate of 5% per annum until the fifth anniversary of the investment and, thereafter, at the rate of 9% per annum. The CPP was amended by the American Recovery and Reinvestment Act of 2009 (“ARRA”) and states that the senior preferred stock could be redeemed within three years without a qualifying equity offering, subject to the approval of its primary federal regulator. After the three years, the senior preferred may be redeemed at any time in whole or in part by the financial institution. Until the third anniversary of the issuance of the senior preferred, the consent of the Treasury is required for an increase in the dividends on the Common Stock or for any stock repurchases unless the senior preferred has been redeemed in its entirety or the Treasury has transferred the senior preferred to third parties. The senior preferred does not have voting rights other than the right to vote as a class on the issuance of any preferred stock ranking senior, any change in its terms, or any merger, exchange, or similar transaction that would adversely affects its rights. The senior preferred also has the right to elect two directors if dividends have not been paid for six periods. The senior preferred is freely transferable and participating institutions will

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be required to file a shelf registration statement covering the senior preferred. The issuing institution must grant the Treasury piggyback registration rights. Prior to issuance, the financial institution and its senior executive officers must modify or terminate all benefit plans and arrangements to comply with EESA. Senior executives must also wave any claims against the Treasury. No dividends may be paid on Common Stock unless dividends have been paid on the senior preferred stock.

Institutions participating in the TARP or CPP are required to issue 10-year warrants for common or preferred stock or senior debt with an aggregate market price equal to 15% of the amount of senior preferred. The Treasury will not exercise voting rights with respect to any shares of Common Stock acquired through exercise of the warrants. The financial institution must file a shelf registration statement covering the warrants and underlying Common Stock as soon as practicable after issuance and grant piggyback registration rights.

If an institution participates in the CPP or if the Secretary acquires a meaningful equity or debt position in the institution as a result of TARP participation, the institution is required to meet certain standards for executive compensation and corporate governance, including a prohibition against incentives to take unnecessary and excessive risks, recovery of bonuses paid to senior executives based on materially inaccurate earnings or other statements and a prohibition against agreements for the payment of golden parachutes. Institutions that sell more than $300 million in assets under TARP auctions or participate in the CPP will not be entitled to a tax deduction for compensation in excess of $500 thousand paid to its chief executive or chief financial official or any of its other three most highly compensated officers. Additional standards with respect to executive compensation and corporate governance for institutions that have participated or will participate in the TARP (including the CPP) were enacted as part of the ARRA, described below.

On December 31, 2008, and subsequent to the Company’s acquisition of GFH, as part of the CPP, the Company entered into a Letter Agreement and Securities Purchase Agreement (collectively, the “Purchase Agreement”) with the Treasury, pursuant to which the Company sold (i) 80,347 shares of the Company’s Series C Preferred Stock, having a liquidation preference of $1,000 per share and (ii) a warrant (the “Warrant”) to purchase 1,325,858 shares of the Company’s Common Stock at an initial exercise price of $9.09 per share, subject to certain anti-dilution and other adjustments, for an aggregate purchase price of $80.3 million in cash. This preferred stock is redeemable at par plus accrued and unpaid dividends subject to the approval of the Company’s primary banking regulators.

The Warrant is immediately exercisable. The Warrant provides for the adjustment of the exercise price and the number of shares of Common Stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of Common Stock, and upon certain issuances of Common Stock at or below a specified price relative to the then-current market price of Common Stock. The Warrant expires ten years from the issuance date. Pursuant to the Purchase Agreement, the Treasury has agreed not to exercise voting power with respect to any shares of Common Stock issued upon exercise of the Warrant.

American Recovery and Reinvestment Act of 2009

The ARRA was enacted on February 17, 2009. The ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, the ARRA imposes certain new executive compensation and corporate governance obligations on all current and future TARP recipients, including the Company, until the institution has redeemed the preferred stock, which TARP recipients are now permitted to do under the ARRA without regard to the three-year holding period and without the need to raise new capital through a qualified equity offering, subject to approval of its primary federal regulator. The executive compensation restrictions under the ARRA (described below) are more stringent than those initially enacted by EESA.

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The ARRA amended Section 111 of the EESA to require the Secretary to adopt additional standards with respect to executive compensation and corporate governance for TARP recipients. The standards required to be established by the Secretary include, in part, (1) prohibitions on making golden parachute payments to senior executive officers and the next 5 most highly-compensated employees during such time as any obligation arising from financial assistance provided under the TARP remains outstanding (the “Restricted Period”), (2) prohibitions on paying or accruing bonuses or other incentive awards for certain senior executive officers and employees, except for awards of long-term restricted stock with a value equal to no greater than 1/3 of the subject employee’s annual compensation that do not fully vest during the Restricted Period or unless such compensation is pursuant to a valid written employment contract prior to February 11, 2009, (3) requirements that TARP CPP participants provide for the recovery of any bonus or incentive compensation paid to senior executive officers and the next 20 most highly-compensated employees based on statements of earnings, revenues, gains, or other criteria later found to be materially inaccurate, with the Secretary having authority to negotiate for reimbursement, and (4) a review by the Secretary of all bonuses and other compensation paid by TARP participants to senior executive employees and the next 20 most highly-compensated employees before the date of enactment of the ARRA to determine whether such payments were inconsistent with the purposes of the Act.

The ARRA also sets forth additional corporate governance obligations for TARP recipients, including requirements for the Secretary to establish standards that provide for semi-annual meetings of compensation committees of the board of directors to discuss and evaluate employee compensation plans in light of an assessment of any risk posed from such compensation plans. TARP recipients are further required by the ARRA to have in place company-wide policies regarding excessive or luxury expenditures, permit non-binding shareholder “say-on-pay” proposals to be included in proxy materials, as well as require written certifications by the chief executive officer and chief financial officer with respect to compliance.

On June 15, 2009, the Treasury published its standards for executive compensation and corporate governance pursuant to ARRA.

Federal Deposit Insurance Corporation

Our customers’ deposit accounts are insured by the FDIC and, therefore, we are subject to insurance assessments imposed by the FDIC. On November 2, 2006, the FDIC adopted final regulations establishing a risk-based assessment system that was intended to more closely tie each bank’s deposit insurance assessments to the risk it poses to the FDIC’s deposit insurance fund. Under the risk-based assessment system, which became effective in the beginning of 2007, the FDIC evaluates each bank’s risk based on three primary factors: (1) its supervisory rating, (2) its financial ratios, and (3) its long-term debt issuer rating, if applicable. The new rates may vary between 5 and 43 cents for every $100 of domestic deposits, depending on the insured institution’s risk category.

On October 16, 2008, the FDIC published a restoration plan designed to replenish the DIF over a period of five years and to increase the deposit insurance reserve ratio, which decreased to 1.01% of insured deposits on June 30, 2008, to the statutory minimum of 1.15% of insured deposits by December 31, 2013. On February 27, 2009, the FDIC published a final rule modifying the risk-based assessment system and extended the period of restoration plan to seven years. In order to implement the restoration plan, the FDIC adjusted both its risk-based assessment system and its base assessment rates. For the first quarter of 2009 only, the FDIC increased all FDIC deposit assessment rates by 7 basis points. These new rates range from 12-14 basis points for Risk Category I institutions to 50 basis points for Risk Category IV institutions. Under the FDIC’s restoration plan, the FDIC established a new initial base assessment rate that will be subject to adjustment as described below. Beginning April 1, 2009, the initial base assessment rates range from 12-16 basis points for Risk Category I institutions to 4 basis points for Risk Category IV institutions. Changes to the risk-based assessment system include increasing premiums for institutions that rely on excessive amounts of brokered deposits to fund rapid growth, excluding Certificate of Deposit Account Registry Service (“CDARS”), increasing premiums for excessive use of secured liabilities, including Federal Home Loan Bank (“FHLB”) advances, lowering premiums for smaller institutions with very high capital levels, and additional financial ratios and debt issuer ratings to the premium calculations for banks with over $10 billion in assets, while providing a reduction for their unsecured debt. After applying all possible adjustments, minimum and maximum total base assessment rates range from 7-24 basis points for Risk Category I institutions to 40-77.5 basis points for Risk Category IV institutions. Either an increase in the Risk Category of the Bank or adjustments to the base assessment rates could have material adverse effect on our earnings.

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In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government corporation established to recapitalize a predecessor to the DIF. Our current annualized assessment rate is 1.14 basis points, or approximately 0.285 basis points per quarter. These assessments will continue until the Financing Corporation bonds mature in 2019.

The FDIC insures our customer deposits through the DIF up to prescribed limits for each depositor. Pursuant to the EESA, the maximum deposit insurance amount has been increased from $100,000 to $250,000 through the end of 2013. The amount of FDIC assessments paid by each DIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors. The FDIC is authorized to set the reserve ratio for the DIF annually between 1.15% and 1.50% of estimated insured deposits. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis. In an effort to restore capitalization levels and to ensure the DIF will adequately cover projected losses from future bank failures, the FDIC, in October 2008, proposed a rule to alter the way in which it differentiates for risk in the risk based assessment system and to revise deposit insurance assessment rates, including base assessment rates.

On February 27, 2009, the FDIC adopted a final rule modifying the risk based assessment system that set initial base assessment rates beginning April 1, 2009 at 12 to 45 basis points and, due to extraordinary circumstances, extended the time within which the reserve ratio must by returned to 1.15% from five to seven years.

On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009. The amount of the special assessment for any institution was limited to 10 basis points times the institution’s assessment base for the second quarter 2009. The special assessment was collected on September 30, 2009.

Additionally, by participating in the transaction account guarantee program under the TLGP, banks temporarily become subject to an additional assessment on deposits in excess of $250,000 in certain transaction accounts and additionally for assessments from 50 basis points to 100 basis points per annum depending on the initial maturity of the debt. Further, all FDIC insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal Government established to recapitalize the predecessor to the DIF. The FICO assessment rates, which are determined quarterly, averaged 0.0113% of insured deposits in fiscal 2008. These assessments will continue until the FICO bonds mature in 2017.

The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices that pose a risk to the DIF or that may prejudice the interest of the bank’s depositors. The termination of deposit insurance for a bank would also result in the revocation of the bank’s charter.

FDIC Temporary Liquidity Guarantee Program (“TLGP”)

On October 14, 2008, the FDIC announced the TLGP. The final rule was adopted on November 21, 2008. The FDIC stated that its purpose is to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks of 31 days or greater, thrifts, and certain holding companies, and by providing full coverage of all noninterest-bearing transaction deposit accounts, regardless of dollar amount. Inclusion in the program was voluntary. Participating institutions are assessed fees based on a sliding scale depending on length of maturity. Shorter-term debt has a lower fee structure and longer-term debt has a higher fee. The range is from 50 basis points on debt of 180 days or less and a maximum of 100 basis points for debt with maturities of one year or longer, on an annualized basis. Through the TAGP, the FDIC also provides for the insurance of all funds held by qualified institutions in noninterest-bearing transaction deposit accounts until December 31, 2010. As previously mentioned, there is a possibility that the TAGP may be extended for an additional 12 months. A 10-basis point surcharge over the institution’s current assessment rate will be applied to those deposits not otherwise covered by the existing deposit insurance limit of $250,000. In addition, a special assessment fee will be collected to cover any losses not covered by the fees to ensure no impact on the FDIC’s DIF. The Company elected to participate in the TLGP.

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Federal Deposits Insurance Corporation Improvement Act of 1991 (“FDICIA”)

FDICIA requires insured institutions with $1 billion or more in total assets at the beginning of their fiscal year to submit independently audited annual reports to the FDIC and the appropriate agency.

These publicly available reports must include: (1) annual financial statements prepared in accordance with accounting principles generally accepted in the United States and such other disclosure requirements as required by the FDIC or the appropriate agency and (2) a management report signed by the Chief Executive Officer and the Chief Financial Officer or Chief Accounting Officer of the institution that contains a statement of management’s responsibilities for: (i) preparing the annual financial statements; (ii) establishing and maintaining an adequate internal control structure and procedures for financial reporting; and (iii) complying with the laws and regulations designed by the FDIC relating to safety and soundness and an assessment of: (aa) the effectiveness of the system of internal control and procedures for financial reporting as of the end of the fiscal year and (bb) the institution’s compliance during the fiscal year with applicable laws and regulations designed by the FDIC relating to safety and soundness.

With respect to any internal control report, the institution’s independent public accountants must attest to, and report separately on, certain assertions of the institution’s management contained in such report. Any attestation by the independent accountant is to be made in accordance with auditing standards generally accepted in the United States for attestation engagements.

Capital Requirements

Each of the FDIC and the Federal Reserve Bank (“FRB”) has issued risk-based and leverage capital guidelines applicable to banking organizations that it supervises. The federal capital standards define capital and establish minimum capital requirements in relation to assets and off-balance sheet exposure as adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profile among bank holding companies and banks, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

Under the risk-based capital requirements, we and our bank subsidiaries are each generally required to maintain a minimum ratio of total capital to risk-weighted assets (including specific off-balance sheet activities, such as standby letters of credit) of 8%. At least half of the total capital must be composed of “Tier 1 Capital,” which is defined as common equity, retained earnings, qualifying perpetual preferred stock, and minority interests in common equity accounts of consolidated subsidiaries, less certain intangibles. The remainder may consist of “Tier 2 Capital,” which is defined as specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock, and a limited amount of the loan loss allowance and pretax net unrealized holding gains on certain equity securities. In addition, each of the federal banking regulatory agencies has established minimum leverage capital requirements for banking organizations. Under these requirements, banking organizations must maintain a minimum ratio of Tier 1 capital to adjusted average quarterly assets equal to 3% to 5%, subject to federal bank regulatory evaluation of an organization’s overall safety and soundness. In summary, the capital measures used by the federal banking regulators are Total Risk-Based Capital ratio (the total of Tier 1 Capital and Tier 2 Capital as a percentage of total risk-weighted assets), Tier 1 Risk-Based Capital ratio (Tier 1 capital divided by total risk-weighted assets), and the Leverage ratio (Tier 1 capital divided by adjusted average total assets). Under these regulations, a bank will be:

• “well capitalized” if it has a Total Risk-Based Capital ratio of 10% or greater, a Tier 1 Risk-Based Capital ratio of 6% or greater, a Leverage ratio of 5% or greater, and is not subject to any written agreement, order, capital directive, or prompt corrective action directive by a federal bank regulatory agency to meet and maintain a specific capital level for any capital measure,

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• “adequately capitalized” if it has a Total Risk-Based Capital ratio of 8% or greater, a Tier 1 Risk-Based Capital ratio of 4% or greater, and a Leverage ratio of 4% or greater (or 3% in certain circumstances) and is not well capitalized,

• “undercapitalized” if it has a Total Risk-Based Capital ratio of less than 8%, a Tier 1 Risk-Based Capital ratio of less than 4% (or 3% in certain circumstances), or a Leverage ratio of less than 4% (or 3% in certain circumstances),

• “significantly undercapitalized” if it has a Total Risk-Based Capital ratio of less than 6%, a Tier 1 Risk-Based Capital ratio of less than 3%, or a Leverage ratio of less than 3%, or

• “critically undercapitalized” if its tangible equity is equal to or less than 2% of tangible assets.

As of December 31, 2009, we believe the Company and BOHR were “adequately capitalized” under these regulations and that Shore was “well capitalized” as of December 31, 2009.

The risk-based capital standards of each of the FDIC and the FRB explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution’s ability to manage these risks, as important factors to be taken into account by the agency in assessing an institution’s overall capital adequacy. The capital guidelines also provide that an institution’s exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a banking organization’s capital adequacy.

Imposition of Liability for Undercapitalized Subsidiaries

Bank regulators are required to take “prompt corrective action” to resolve problems associated with insured depository institutions whose capital declines below certain levels. In the event an institution becomes “undercapitalized,” it must submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each company having control of the undercapitalized institution guarantees the subsidiary’s compliance with the capital restoration plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy. The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5% of the institution’s assets at the time it became undercapitalized or the amount necessary to cause the institution to be “adequately capitalized.” The bank regulators have greater power in situations where an institution becomes “significantly” or “critically” undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve approval of proposed dividends or might be required to consent to a consolidation or to divest the troubled institution or other affiliates.

The FDIC may take various corrective actions against any undercapitalized bank and any bank that fails to submit an acceptable capital restoration plan or fails to implement a plan acceptable to the FDIC. These powers include, but are not limited to, requiring the institution to be recapitalized, prohibiting asset growth, restricting interest rates paid, requiring prior approval of capital distributions by any bank holding company that controls the institution, requiring divestiture by the institution of its subsidiaries or by the holding company of the institution itself, requiring new election of directors, and requiring the dismissal of directors and officers.

Other Safety and Soundness Regulations

There are significant obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance fund in the event that the depository institution is insolvent or is in danger of becoming insolvent. These obligations and restrictions are not for the benefit of investors. Regulators may pursue an administrative action against any bank holding company or bank which violates the law, engages in an unsafe or unsound banking practice, or is about to engage in an unsafe or unsound banking practice. The administrative action could take the form of a cease and desist proceeding, a removal action against the responsible individuals or, in the case of a violation of law or unsafe and unsound banking practice, a civil monetary penalty action. A cease and desist order, in addition to prohibiting certain action, could also require that certain actions be undertaken. Under the policies of the FRB, we are required to serve as a source of financial strength to our subsidiary depository institutions and to commit resources to support the banks in circumstances where we might not do so otherwise.

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The Bank Secrecy Act (“BSA”)

Under the BSA, a financial institution is required to have systems in place to detect certain transactions, based on the size and nature of the transaction. Financial institutions are generally required to report cash transactions involving more than $10,000 to the Treasury. In addition, financial institutions are required to file suspicious activity reports for transactions that involve more than $5,000 and which the financial institution knows, suspects, or has reason to suspect involves illegal funds, is designed to evade the requirements of the BSA, or has no lawful purpose.

USA Patriot Act of 2001

In October 2001, the USA Patriot Act of 2001 was enacted in response to the terrorist attacks in New York, Pennsylvania, and Washington, D.C. that occurred on September 11, 2001. The Patriot Act is intended to strengthen U.S. law enforcement and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations, including standards for verifying client identification at account opening and rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that my be involved in terrorism or money laundering. The continuing and potential impact of the Patriot Act and related regulations and policies on financial institutions of all kinds is significant and wide-ranging.

Monetary Policy

The commercial banking business is affected not only by general economic conditions but also by the monetary policies of the FRB. The instruments of monetary policy employed by the Federal Reserve include open market operations in United States government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against deposits held by federally insured banks. The FRB’s monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national and international economies and in the money markets, as well as the effect of actions by monetary and fiscal authorities, including the Federal Reserve System, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand, or the business and earnings of our bank subsidiaries, their subsidiaries, or any of our other subsidiaries.

Transactions with Affiliates

Transactions between banks and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any bank or entity that controls, is controlled by, or is under common control with such bank. Generally, Sections 23A and 23B (i) limit the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus and maintain an aggregate limit on all such transactions with affiliates to an amount equal to 20% of such capital stock and surplus and (ii) require that all such transactions be on terms substantially the same as, or at least as favorable to those that, the bank has provided to a non-affiliate.

The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee, and similar other types of transactions. Section 23B applies to “covered transactions” as well as sales of assets and payments of money to an affiliate. These transactions must also be conducted on terms substantially the same as, or at least favorable to those that, the bank has provided to non-affiliates.

We are aware of and previously disclosed to our regulators that $21.5 million of a loan from BOHR to the Company is inadequately secured in violation of Regulation W promulgated by the Federal Reserve. The Company has been in discussions with banking regulators regarding the potential for repayment of this loan through possible capital raising efforts. Additionally, as of December 31, 2009, we are aware of and previously disclosed to our regulators that loans from Shore to its affiliates exceeded the 20% threshold. We are discussing options to cure these violations with our regulators.

Loans to Insiders

The Federal Reserve Act and related regulations impose specific restrictions on loans to directors, executive officers, and principal shareholders of banks. Under Section 22(h) of the Federal Reserve Act, loans to a director, an executive officer, and to a principal shareholder of a bank as well as to entities controlled by any of the foregoing

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may not exceed, together with all other outstanding loans to such person and entities controlled by such person, the bank’s loan-to-one borrower limit. Loans in the aggregate to insiders and their related interests as a class may not exceed two times the bank’s unimpaired capital and unimpaired surplus until the bank’s total assets equal or exceed $100 million at which time the aggregate is limited to the bank’s unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers, and principal shareholders of a bank or bank holding company and to entities controlled by such persons, unless such loan is approved in advance by a majority of the board of directors of the bank with any “interested” director not participating in the voting. The FDIC has prescribed the loan amount, which includes all other outstanding loans to such person as to which such prior board of director approval is required, as being the greater of $25,000 or 5% of capital and surplus (up to $500,000). Section 22(h) requires that loans to directors, executive officers, and principal shareholders be made on terms and underwriting standards substantially the same as offered in comparable transactions to other persons. As of December 31, 2009, there were no loans to insiders and their related interests in the aggregate that exceeded the Company’s or Banks’ unimpaired capital and unimpaired surplus. However, BOHR currently has three outstanding loans that exceed the Bank’s loan-to-one borrower limit by the following percentages: 10.4%, 16.6%, and 47.5%.

Community Reinvestment Act of 1977 (“CRA”)

Under the CRA and related regulations, depository institutions have an affirmative obligation to assist in meeting the credit needs of their market areas, including low and moderate-income areas, consistent with safe and sound banking practice. The CRA requires the adoption by each institution of a CRA statement for each of its market areas describing the depository institution’s efforts to assist in its community’s credit needs. Depository institutions are periodically examined for compliance with the CRA and are periodically assigned ratings in this regard. Banking regulators consider a depository institution’s CRA rating when reviewing applications to establish new branches, undertake new lines of business, and/or acquire part or all of another depository institution. An unsatisfactory rating can significantly delay or even prohibit regulatory approval of a proposed transaction by a bank holding company or its depository institution subsidiaries.

The Gramm-Leach-Bliley Act (“GLBA”) and federal bank regulators have made various changes to the CRA. Among other changes, CRA agreements with private parties must be disclosed and annual reports must be made to a bank’s primary federal regulator. A bank holding company or any of its subsidiaries will not be permitted to engage in new activities authorized under the GLBA if any bank subsidiary received less than a “satisfactory” rating in its latest CRA examination. During our last CRA exam, our rating was “satisfactory.”

Gramm-Leach-Bliley Act of 1999

The GLBA covers a broad range of issues, including a repeal of most of the restrictions on affiliations among depository institutions, securities firms, and insurance companies. The following description summarizes some of its significant provisions.

The GLBA provides that the states continue to have the authority to regulate insurance activities but prohibits the states in most instances from preventing or significantly interfering with the ability of a bank, directly or through an affiliate, to engage in insurance sales, solicitations, or cross-marketing activities. Although the states generally must regulate bank insurance activities in a nondiscriminatory manner, the states may continue to adopt and enforce rules that specifically regulate bank insurance activities in areas identified under the law. Under the law, the federal bank regulatory agencies adopted insurance consumer protection regulations that apply to sales practices, solicitations, advertising, and disclosures.

The GLBA contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, both at the inception of the customer relationship and on an annual basis, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. The law provides that, except for specific limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. An institution may not disclose to a non-affiliated third party, other than to a consumer credit reporting agency, customer account numbers or other similar account identifiers for marketing purposes. The GLBA also provides that the states may adopt customer privacy protections that are stricter than those contained in the act.

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The GLBA repeals sections 20 and 32 of the Glass-Steagall Act, thus permitting unrestricted affiliations between banks and securities firms.

Consumer Laws Regarding Fair Lending

In addition to the CRA described above, other federal and state laws regulate various lending and consumer aspects of our business. Governmental agencies, including the Department of Housing and Urban Development, the Federal Trade Commission, and the Department of Justice, have become concerned that prospective borrowers may experience discrimination in their efforts to obtain loans from depository and other lending institutions. These agencies have brought litigation against depository institutions alleging discrimination against borrowers. Many of these suits have been settled, in some cases for material sums of money, short of a full trial.

These governmental agencies have clarified what they consider to be lending discrimination and have specified various factors that they will use to determine the existence of lending discrimination under the Equal Credit Opportunity Act and the Fair Housing Act, including evidence that a lender discriminated on a prohibited basis, evidence that a lender treated applicants differently based on prohibited factors in the absence of evidence that the treatment was the result of prejudice or a conscious intention to discriminate, and evidence that a lender applied an otherwise neutral non-discriminatory policy uniformly to all applicants but the practice had a discriminatory effect unless the practice could be justified as a business necessity.

Banks and other depository institutions also are subject to numerous consumer-oriented laws and regulations. These laws, which include the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, and the Fair Housing Act, require compliance by depository institutions with various disclosure requirements and requirements regulating the availability of funds after deposit or the making of some loans to customers.

Future Regulatory Uncertainty

Because federal and state regulation of financial institutions changes regularly and is the subject of constant legislative debate, we cannot forecast how federal and state regulation of financial institutions may change in the future and, as a result, impact our operations. Although Congress and the state legislature in recent years have sought to reduce the regulatory burden on financial institutions with respect to the approval of specific transactions, we fully expect that the financial institution industry will remain heavily regulated in the near future and that additional laws or regulations may be adopted further regulating specific banking practices.

Employees

As of December 31, 2009, we employed 699 people, of whom 694 were full-time employees.

Subsequent Events

Deferral of Trust Preferred Dividends. In January 2010, the Company exercised its right to defer all quarterly distributions on the trust preferred securities it assumed in connection with its merger with GFH, which are identified immediately below (collectively, the “Trust Preferred Securities”).

	Amount (in thousands)	Interest Rate		Redeemable on or After	Mandatory Redemption
Gateway Capital Statutory Trust I	8,000	LIBOR + 3.10	%	September 17, 2008	September 17, 2033
Gateway Capital Statutory Trust II	7,000	LIBOR + 2.65	%	July 17, 2009	June 17, 2034
Gateway Capital Statutory Trust III	15,000	LIBOR + 1.50	%	May 30, 2011	May 30, 2036
Gateway Capital Statutory Trust IV	25,000	LIBOR + 1.55	%	July 30, 2012	July 30, 2037

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On April 9, 2010, the Company exercised its right to continue the deferral of such quarterly distributions. Interest payable under the Trust Preferred Securities continues to accrue during the deferral period and interest on the deferred interest also accrues, both of which must be paid at the end of the deferral period. Prior to the expiration of the deferral period, the Company has the right to further defer interest payments, provided that no deferral period, together with all prior deferrals, exceeds 20 consecutive quarters and that no event of default (as defined by the terms of the applicable Trust Preferred Securities) has occurred and is continuing at the time of the deferral. The Company was not in default with respect to the terms of the Trust Preferred Securities at the time the quarterly payments were deferred and such deferrals did not cause an event of default under the terms of the Trust Preferred Securities.

Non-Compliance Notice from the NASDAQ Stock Market. On April 1, 2010, the Company received a non-compliance notice from the NASDAQ Stock Market stating that because the Company did not timely file its Annual Report on Form 10-K for the period ended December 31, 2009, it is no longer in compliance with the rules for continued listing, including Rule 5250(c)(l). NASDAQ Marketplace Rule 5250(c)(l) requires the Company to file with NASDAQ, on a timely basis, all reports and other documents required to be filed with the Securities and Exchange Commission. The Company believes that it will regain compliance with NASDAQ’s listing rules upon the filing of this Form 10-K and will seek confirmation from NASDAQ accordingly.

Available Information

We maintain Internet websites at www.bankofhamptonroads.com, www.shorebank.com, and www.trustgateway.com. These websites contain a link to our filings with the Security Exchange Commission (“SEC”) on Form 10-K, Form 10-Q, and Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. The reports are made available on this website as soon as practicable following the filing of the reports with the SEC. The information is free of charge and may be reviewed, downloaded, and printed from the website at any time. You may also read and copy any material we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. Copies of these materials may be obtained at prescribed rates from the SEC at such address. These materials can also be inspected on the SEC’s web site at www.sec.gov.

ITEM 1A – RISK FACTORS

An investment in our Common Stock involves risks. You should carefully consider the risks described below in conjunction with the other information in this Form 10-K, including our consolidated financial statements and related notes, before investing in our Common Stock. In addition to the other information contained in this report, the following risks may affect us. This Form 10-K contains forward-looking statements that involve risks and uncertainties, including statements about our future plans, objectives, intentions and expectations. Past results are not a reliable indicator of future results, and historical trends should not be used to anticipate results or trends in future periods. Many factors, including those described below, could cause actual results to differ materially from those discussed in forward-looking statements.

Risks Relating to our Business

We incurred significant losses in 2009 and may continue do so in the future and we can make no assurances as to when we will be profitable.

The Company reported a net loss for 2009 of approximately $145.5 million, primarily a result of a provision for loan losses of $134.2 million, a goodwill impairment charge of $84.8 million, and a loss on investments due to an other-than-temporary impairment charge on available-for-sale securities of $2.5 million. In light of the current economic environment, significant additional provisions for loan losses may be necessary to supplement the allowance for loan losses in the future. As a result, we may incur significant credit costs in 2010, which would continue to adversely impact our financial condition and results of operations and the value of our Common Stock.

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We need to raise additional capital that may not be available to us.

Regulatory authorities require us to maintain certain levels of capital to support our operations. As described above, we are “adequately capitalized” and have an immediate need to raise capital. In addition, even if we succeed in raising this capital, we may need to raise additional capital in the future due to additional losses or regulatory mandates. The ability to raise additional capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control, and on our financial performance.

Accordingly, additional capital may not be raised, if and when needed, on terms acceptable to us, or at all. If we cannot raise additional capital when needed, our ability to increase our capital ratios could be materially impaired, and we could face additional regulatory challenges. In addition, if we issue additional equity capital, it may be at a lower price and in all cases our existing shareholders’ interest would be diluted.

We may not be able to successfully maintain our regulatory capital, which may adversely affect our results of operations and financial condition.

We may need to raise further capital in the future to sustain our capital levels. As indicated above, our ability to raise capital through the sale of additional securities will depend primarily upon our financial condition and the condition of financial markets at that time. Our regulatory capital at December 31, 2009, was $44.7 million below the level required to be considered “well-capitalized” on a consolidated basis under the regulations of the Federal Reserve. If we fall further below this level, we could face additional regulatory action that could limit our future operations, and we may not be able to obtain additional capital in satisfactory amounts or terms or at all. Our growth or financial condition may be constrained if we are unable to raise capital as needed.

BOHR is restricted from accepting brokered deposits and offering interest rates on deposits that are substantially higher than the prevailing rates in our market.

During the fourth quarter of 2009, the regulatory risk-based capital ratios of BOHR declined significantly largely due to significant additional provisions to our allowance for loan losses. While BOHR’s ratios were still above levels required to be considered “adequately capitalized” at December 31, 2009, it was not considered “well-capitalized” under regulatory guidelines. The impact of not maintaining a “well-capitalized” status is of concern in that it could jeopardize our ability to acquire needed funding through sources such as brokered deposits, FHLB advances, or unsecured federal funds credit lines and could tighten our liquidity through damages to our reputation in our deposit service areas. This could also lead to increased scrutiny by regulatory agencies and possible sanctions. In response to our declining capital position, we could improve our capital position with additional issuances of equity securities. We may also limit or postpone future asset growth or even shrink our assets in order to maintain appropriate regulatory capital levels. These efforts, however, may not be successful. Current and future restrictions on the conduct of our business could adversely impact our ability to attract deposits.

Section 29 of the Federal Deposit Insurance Act (“FDIA”) limits the use of brokered deposits by institutions that are less than “well-capitalized” and allows the FDIC to place restrictions on interest rates that institutions may pay. Because BOHR is no longer considered “well capitalized” for regulatory purposes, it is, among other restrictions, prohibited from paying rates in excess of 75 basis points above the national market average on deposits of comparable maturity. Effective January 1, 2010, financial institutions that are not “well capitalized” will be prohibited from paying yields for deposits in excess of 75 basis points above a new national average rate for deposits of comparable maturity, as calculated by the FDIC, except in very limited circumstances where the FDIC permits use of a higher local market rate. The national rate may be lower than the prevailing rates in our local markets, and BOHR (if it is unable to regain “well capitalized” status) may not be able to secure the permission of the FDIC to use a local market rate. If restrictions on the rates our Banks are able to pay on deposit accounts negatively impacts their ability to compete for deposits in our market area, our Banks may be unable to attract or maintain core deposits, and their liquidity and ability to support demand for loans could be adversely affected.

Because we believe Shore met the definition of “well capitalized” at December 31, 2009, it is not subject to these restrictions.

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We expect to enter into a written agreement with the Federal Reserve, which will require us to designate a significant amount of resources to complying with the agreement.

We expect that we will enter into a written agreement with the Federal Reserve in the next few months. While we do not know the exact contents of the written agreement at this time, it could, among other things, inhibit our ability to grow assets or open new branch offices. We expect that it might require us to take certain actions, including but not limited to establishing and submitting the following to the Federal Reserve:

• A written plan to strengthen oversight of our management and operations by our board of directors,

• A written assessment of our management and staffing needs and the qualifications of our senior management to ensure that we are adequately staffed by adequate personnel,

• A written plan to strengthen our management of commercial real estate concentrations, including steps to reduce or mitigate the risk of concentrations in light of current market conditions,

• A written plan to strengthen our credit risk management practices,

• A written program for the ongoing review and risk grading procedures of our loan portfolio,

• A written program for the maintenance of an adequate allowance for loan losses, including a methodology consistent with relevant supervisory guidance and policies and procedures to ensure adherence to the revised methodology,

• A written plan to maintain sufficient capital at BOHR,

• A written plan designed to improve management of our liquidity position and funds management practices, and

• A written contingency funding plan that, at a minimum, identifies available sources of liquidity and includes adverse scenario planning.

In addition, we expect that the written agreement might require us to implement plans to appoint a committee of our board of directors to monitor and coordinate compliance with the provisions of the written agreement. Any written plans, programs, or assessments required by the written agreement with the Federal Reserve will require approval by the Federal Reserve and prompt implementation upon receipt of such approval. While subject to the written agreement, we expect that our management and board of directors will be required to focus considerable time and attention on taking corrective actions to comply with its terms.

There also is no guarantee that we will successfully address the Federal Reserve’s concerns in the anticipated written agreement or that we will be able to comply with it. If we do not comply with the anticipated written agreement, we could be subject to the assessment of civil monetary penalties, further regulatory sanctions and/or regulatory enforcement actions.

We may become subject to additional regulatory restrictions in the event that our regulatory capital levels continue to decline.

Although we believe the Company and BOHR both qualified as “adequately capitalized” and Shore qualified as “well-capitalized” under the regulatory framework, as of December 31, 2009, the additional regulatory restrictions resulting from the decline in our capital category, or any further decline, could have a material adverse effect on our business, financial condition, results of operations, cash flows, and/or future prospects.

If a state member bank is classified as “undercapitalized,” that bank is required to submit a capital restoration plan to the Federal Reserve. Pursuant to FDICIA, an “undercapitalized bank” is prohibited from increasing its assets, engaging in a new line of business, acquiring any interest in any company or insured depository institution, or opening or acquiring a new branch office, except under certain circumstances, including the acceptance by the Federal Reserve of a capital restoration plan for the bank. Furthermore, if a state non-member bank is classified as “undercapitalized,” the FDIC may take certain actions to correct the capital position of the bank; if a bank is classified as “significantly undercapitalized” or “critically undercapitalized,” the Federal Reserve would be required to take one or more prompt corrective actions. These actions would include, among other things, requiring sales of new securities to bolster capital, improvements in management, limits on interest rates paid, prohibitions on transactions with affiliates, termination of certain risky activities, and restrictions on compensation paid to executive officers. If a bank is classified as “critically undercapitalized,” FDICIA requires the bank to be placed into conservatorship or receivership within 90 days, unless the Federal Reserve determines that other action would better achieve the purposes of FDICIA regarding prompt corrective action with respect to undercapitalized banks.

Under FDICIA, banks may be restricted in their ability from accepting broker deposits, depending on their capital classification. “Well-capitalized” banks are permitted to accept broker deposits, but all banks that are not “well-capitalized” could be restricted to accept such deposits. The FDIC may, on a case-by-case basis, permit banks that are “adequately capitalized,” such as BOHR, to accept broker deposits if the FDIC determines that acceptance of such deposits would not constitute an unsafe or unsound banking practice with respect to the bank. These restrictions could materially and adversely affect our ability to access lower cost funds and thereby decrease our future earnings capacity.

Our financial flexibility could be severely constrained if we are unable to renew our wholesale funding or if adequate financing is not available in the future at acceptable rates of interest. We may not have sufficient liquidity to continue to fund new loan originations, and we may need to liquidate loans or other assets unexpectedly in order to repay obligations as they mature. Our inability to obtain regulatory consent to accept or renew brokered deposits could have a material adverse effect on our business, financial condition, results of operations, cash flows, and/or future prospects.

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Finally, the capital classification of a bank affects the frequency of examinations of the bank, the deposit insurance premiums paid by such bank, and the ability of the bank to engage in certain activities, all of which could have a material adverse effect on our business, financial condition, results of operations, cash flows, and/or future prospects. Under FDICIA, the FDIC is required to conduct a full-scope, on-site examination of every bank at least once every twelve months, subject to certain exceptions.

Our estimate for losses in our loan portfolio may be inadequate, which would cause our results of operations and financial condition to be adversely affected.

We maintain an allowance for loan losses, which is a reserve established through a provision for possible loan losses charged to our expenses and represents management’s best estimate of probable losses within our existing portfolio of loans. Our allowance for loan losses amounted to $132.7 million at December 31, 2009, as compared to $99.2 million at September 30, 2009 and $51.2 million at December 31, 2008. The level of the allowance reflects management’s estimates and judgments as to specific credit risks, evaluation of industry concentrations, loan loss experience, current loan portfolio quality, present economic, political, and regulatory conditions, and unidentified losses inherent in the current loan portfolio, which have been increasing in light of recent economic conditions. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires management to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Any such increases in the allowance for loan losses may have a material adverse effect on our results of operations, financial condition, and the value of our Common Stock.

We have had and may continue to have large numbers of problem loans and difficulties with our loan administration, which could increase our losses related to loans.

Our non-performing assets as a percentage of total assets increased to 8.64% at December 31, 2009 from 1.34% at December 31, 2008 and 6.28% at September 30, 2009. On December 31, 2009, over 1.9% of our loans are 30 to 89 days delinquent and are treated as performing assets. Based on these delinquencies, we expect more loans to become non-performing. The administration of non-performing loans is an important function in attempting to mitigate any future losses related to our non-performing assets.

In the past, our management of non-performing loans was, at times, not as strong as we would prefer. In 2009, we hired an independent third party to review a significant portion of our loans. The independent third party discovered several issues with our loan management that we have since taken significant remedial steps to address. The following issues were identified: updated appraisals on problem loans and large loans secured by real estate were not always being obtained; better organized credit files; additional resources were needed to manage problem loans; and lack of well-defined internal workout policies and procedures.

A variety of initiatives were undertaken in 2009 to remediate the conditions noted above as well as other enhancements to our credit review and collection processes. Initiatives and procedures which augmented the credit administration function included acquisition and development loan reviews, interest reserve loan reviews, past due loan reviews, forecasting reviews, standard loan reviews, loans presented for approval and renewal, relationship reviews, and global cash flow analyses. We have improved the organization of our credit files and have made efforts to attain appraisal updates in a more timely manner. In addition to the internal review of credit quality, we engaged an independent credit consulting firm to conduct an analysis of our loan portfolio. We also increased staffing in credit administration and established and staffed a separate special assets function to manage problem assets.

Although we have made significant enhancements to our loan management processes to address these issues, we can give you no assurances that we will be able to successfully manage our problem loans, our loan administration, and origination process. If we are unable to do so in a timely manner, our loan losses could increase significantly and this could have a material adverse effect on our results of operations and the value of, or market for, our Common Stock.

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Our lack of eligibility to continue to use a short form registration statement on Form S-3 may affect our short-term ability to access the capital markets.

Any resulting delay in the ability to regain S-3 eligibility may result in offering terms that may not be advantageous to us. The ability to conduct primary offerings under a registration statement on Form S-3 has benefits to issuers who are eligible to use this short form registration statement. Form S-3 permits an eligible issuer to incorporate by reference its past and future filings and reports made under the Securities Exchange Act of 1934, as amended, or the Exchange Act. In addition, Form S-3 enables eligible issuers to conduct primary offerings “off the shelf” under Rule 415 of the Securities Act of 1933, as amended, or the Securities Act. The shelf registration process under Form S-3, combined with the ability to incorporate information on a forward basis, allows issuers to avoid additional delays and interruptions in the offering process and to access the capital markets in a more expeditious and efficient manner than raising capital in a standard registered offering on Form S-1. The ability to register securities for resale may also be limited as a result of the loss of S-3 eligibility.

One of the requirements for Form S-3 eligibility is for an issuer to have remained current on all of its cumulative dividend payments. During 2009, we suspended the payment of dividends on the Series C Preferred Stock, which pays cumulative dividends. In addition, we have been unable to pay our trust preferred dividend payments as of late. Another requirement for Form S-3 eligibility is for an issuer to have timely filed its Exchange Act reports (including Forms 10-K, 10-Q and certain Forms 8-K) for the 12-month period and any portion of the month immediately before the filing of such Form S-3. We were unable to timely file this Form 10-K. Without Form S-3 eligibility, we may experience delays in our ability to raise capital in the capital markets until we are current on all cumulative dividend payments. Assuming we were to become current on all cumulative dividend payments prior to the end of 2010 and timely file our required Exchange Act reports for approximately the next 12 months, the earliest we could regain the ability to use Form S-3 is April 1, 2011.

If our Company were to suffer loan losses similar in amounts to those that may be predicted by a SCAP test, they could have a material adverse effect on our results of operations and the price, and market for, our Common Stock.

The Treasury, in connection with its Supervisory Capital Assessment Program (“SCAP”), in 2009 administered a stress or SCAP test to the nation’s 19 largest banks based upon their loan balances at December 31, 2008. It has not administered a SCAP test to our company. The SCAP test is based on a 2-year cumulative loan loss assumption that represents two scenarios, a “baseline” and “more adverse” than expected scenario. These scenarios are not forecasts or projections of expected loan losses. However, if the SCAP test were to be applied, as of December 31, 2008, we believe our potential cumulative loan losses over the next two years under the “baseline” scenario may be $170 million, and under the “more adverse” scenario may be $280 million. These scenarios do not take into account our existing loan loss allowance or existing loan mark downs, so our future loan loss provision could be significantly less than these amounts. Nevertheless, if our Company were to suffer loan losses similar in amounts to those that may be predicted by a SCAP test, they could have a material adverse effect on our results of operations and the price, and market for, our stock.

We have recently had significant turnover in our senior management team, and this turnover could negatively impact our future results of operations.

Our success depends substantially on the skill and abilities of our executive officers and senior lending officers. The recent loss of key personnel has disrupted our operations. During the first three quarters of 2009, the Chief Executive Officer of the Company, the President of the Company (and former Chief Executive Officer of Gateway), the Chief Credit Officer, and the President of Shore resigned. We have now filled many of these positions, most recently hiring our new Chief Credit Officer in October 2009. We hired our new President and Chief Executive Officer in July 2009 and Executive Vice President and Chief Financial Officer in February 2009. In 2009, the Company established a special assets group and hired a Senior Vice President to lead the group. We cannot guarantee you that this new management team will be successful in executing our strategy and improving our current results of operations.

Governmental regulation and regulatory actions against us may impair our operations or restrict our growth.

We are subject to significant governmental supervision and regulation. These regulations are intended primarily for the protection of depositors, rather than shareholders. Statutes and regulations affecting our business may be changed at any time and the interpretation of these statutes and regulations by examining authorities may also change. Within the last several years, Congress and the President have passed and enacted significant changes to these

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statutes and regulations. There can be no assurance that such changes to the statutes and regulations or to their interpretation will not adversely affect our business. In addition to governmental supervision and regulation, we are subject to changes in other federal and state laws, including changes in tax laws, which could materially affect the banking industry. We are subject to the rules and regulations of the Federal Reserve. If we fail to comply with federal and state bank regulations, the regulators may limit our activities or growth and impose monetary penalties, which could severely limit or end our operations. Banking laws and regulations change from time to time. Bank regulations can hinder our ability to compete with financial services companies that are not regulated in the same manner or are less regulated. Federal and state bank regulatory agencies regulate many aspects of our operations. These areas include:

• The level of capital that must be maintained;

• The kinds of activities that can be engaged in;

• The kinds and amounts of investments that can be made;

• The locations of our financial centers;

• Insurance of deposits and the premiums that we must pay for this insurance; and

• The amount of cash we must set aside as reserves for deposits.

Bank regulatory authorities have the authority to bring enforcement actions against banks and bank holding companies for unsafe or unsound practices in the conduct of their businesses or for violations of any law, rule or regulation, any condition imposed in writing by the appropriate bank regulatory agency or any written agreement with the authority.

We are aware of and previously disclosed to our regulators that $21.5 million of a loan from BOHR to the Company is inadequately secured in violation of Regulation W promulgated by the Federal Reserve. Additionally, as of December 31, 2009, we are aware of and previously disclosed to our regulators that loans from Shore to its affiliates exceeded 20% of its capital stock and surplus. Possible enforcement actions against us could include the issuance of a cease-and-desist order that could be judicially enforced; the imposition of civil monetary penalties; the issuance of directives to increase capital or enter into a strategic transaction, whether by merger or otherwise, with a third party; the appointment of a conservator or receiver; the termination of insurance of deposits; the issuance of removal and prohibition orders against institution-affiliated parties; and the enforcement of such actions through injunctions or restraining orders. Any such regulatory action may have a material adverse effect on our ability to operate our bank subsidiaries and execute our strategy.

If the value of real estate in the markets we serve were to decline materially, a significant portion of our loan portfolio could become under-collateralized, which could have a material adverse effect on us.

With approximately three-fourths of our loans concentrated in the regions of Hampton Roads and Richmond of Virginia, the Eastern Shore of Maryland, and the Triangle region of North Carolina, a decline in local economic conditions could adversely affect the value of the real estate collateral securing our loans. Moreover, our markets in Wilmington, North Carolina and the Outer Banks of North Carolina have been especially hard hit by recent declines in real estate values. A further decline in property values would diminish our ability to recover on defaulted loans by selling the real estate collateral, making it more likely that we would suffer losses on defaulted loans. Additionally, a decrease in asset quality could require additions to our allowance for loan losses through increased provisions for loan losses, which would negatively impact our profits. Also, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of financial institutions whose real estate loan portfolios are more geographically diverse. Real estate values are affected by various factors in addition to local economic conditions, including, among other things, changes in general or regional economic conditions, governmental rules or policies, and natural disasters.

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Our construction and land development, commercial real estate, and equity line lending may expose us to a greater risk of loss and hurt our earnings and profitability.

Our business strategy centers, in part, on offering construction and land development, commercial, and equity line loans secured by real estate in order to generate interest income. These types of loans generally have higher yields and shorter maturities than traditional one-to-four family residential mortgage loans. At December 31, 2009, construction and land development, commercial, and residential loans secured by real estate totaled $2.0 billion, which represented 83% of total loans. Such loans increase our credit risk profile relative to other financial institutions that have higher concentrations of one-to-four family loans.

Loans secured by commercial or land development real estate properties are generally for larger amounts and involve a greater degree of risk than one-to-four family residential mortgage loans. Payments on loans secured by these properties generally are dependent on the income produced by the underlying properties which, in turn, depends on the successful operation and management of the properties. Accordingly, repayment of these loans is subject to adverse conditions in the real estate market or the local economy. While we seek to minimize these risks in a variety of ways, there can be no assurance that these measures will protect against credit-related losses.

Construction financing typically involves a higher degree of credit risk than financing on improved, owner-occupied real estate. Risk of loss on a construction loan is largely dependent upon the accuracy of the initial estimate of the property’s value at completion of construction, the marketability of the property, and the bid price and estimated cost (including interest) of construction. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of the value proves to be inaccurate, we may be confronted, at or prior to the maturity of the loan, with a project whose value is insufficient to assure full repayment. When lending to builders, the cost of construction breakdown is provided by the builder, as well as supported by the appraisal. Although our underwriting criteria are designed to evaluate and minimize the risks of each construction loan, there can be no guarantee that these practices will safeguard against material delinquencies and losses to our operations.

At December 31, 2009, we had loans of $757.7 million or 31% of total loans outstanding to finance construction and land development. Construction and land development loans are dependent on the successful completion of the projects they finance, however, in many cases such construction and development projects in our primary market areas are not being completed in a timely manner, if at all.

Equity line loans typically involve a greater degree of risk than one-to-four family residential mortgage loans. Equity line lending allows a customer to access an amount up to their line of credit for the term specified in their agreement. At the expiration of the term of an equity line, a customer may have the entire principal balance outstanding as opposed to a one-to-four family residential mortgage loan where the principal is disbursed entirely at closing and amortizes throughout the term of the loan. We cannot predict when and to what extent our customers will access their equity lines. While we seek to minimize this risk in a variety of ways, including attempting to employ conservative underwriting criteria, there can be no assurance that these measures will protect against credit-related losses.

Our lending on vacant land may expose us to a greater risk of loss and may have an adverse effect on results of operations.

A portion of our residential and commercial lending is secured by vacant or unimproved land. Loans secured by vacant or unimproved land are generally more risky than loans secured by improved property for one-to-four family residential mortgage loans. Since vacant or unimproved land is generally held by the borrower for investment purposes or future use, payments on loans secured by vacant or unimproved land will typically rank lower in priority to the borrower than a loan the borrower may have on their primary residence or business. These loans are susceptible to adverse conditions in the real estate market and local economy. At December 31, 2009, loans secured by vacant or unimproved property totaled $55.3 million or 2% of our loan portfolio.

Difficult market conditions have adversely affected our industry.

The global and U.S. economies continue to experience a protracted slowdown in business activity as a result of disruptions in the financial system, including a lack of confidence in the worldwide credit markets. Currently, the U.S. economy remains in the midst of one of its longest economic recessions in recent history. Dramatic declines in the housing market over the past 18 months, with falling home prices and increasing foreclosures, unemployment, and under-employment, have negatively impacted the credit performance of real estate related loans and resulted in significant write-downs of asset values by financial institutions. These write-downs, initially of asset-backed

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securities but spreading to other securities and loans, have caused many financial institutions to seek additional capital, to reduce or eliminate dividends, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. Market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility, and widespread reduction of business activity generally. The resulting economic pressure on consumers and lack of confidence in the financial markets could continue to adversely affect our business, financial condition, and results of operations. Market developments may continue to affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates, which may impact our charge-offs and provision for credit losses. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and could have a material adverse effect on the value of, or market for, our Common Stock.

A significant part of Gateway’s loan portfolio is unseasoned, and we can give no assurances as to the levels of future losses related to that portfolio.

On December 31, 2008, we acquired Gateway. From the beginning of 2007 through September 30, 2008, Gateway’s loan portfolio grew by approximately 21%, including approximately $166 million in loans acquired as a result of its 2007 acquisition of The Bank of Richmond, N.A. It is difficult to assess the future potential performance of this part of Gateway’s loan portfolio due to the relatively recent origination of these loans, as it can take several years for loan difficulties to become apparent. We can give no assurance regarding the extent to which these loans may become non-performing or delinquent, leading to future losses.

We are not paying dividends on our preferred stock or Common Stock and are deferring distributions on our Trust Preferred Securities, and we are prevented in otherwise paying cash dividends on our Common Stock. The failure to resume paying dividends on our Series C Preferred Stock and Trust Preferred Securities may adversely affect us.

We historically paid cash dividends prior to the third quarter of 2009. During the third quarter of 2009, we suspended dividend payments on our Common Stock. In the fourth quarter of 2009, we also suspended Series A Preferred Stock and Series B Preferred Stock dividends and began to defer dividends on our Series C Preferred Stock and on our Trust Preferred Securities.

We are prevented from paying dividends until our financial position improves. There is no assurance that we will be able to resume paying cash dividends. Even if allowed to resume paying dividends again, future payment of cash dividends on our Common Stock, if any, will be subject to the prior payment of all unpaid dividends and deferred distributions on our Series C Preferred Stock and Trust Preferred Securities.

In addition, all dividends are declared and paid at the discretion of our board of directors and are dependent upon our liquidity, financial condition, results of operations, regulatory capital requirements, and such other factors as our board of directors may deem relevant. Further, dividend payments on our Series C Preferred Stock and distributions on our Trust Preferred Securities are cumulative, and therefore, unpaid dividends and distributions will accrue and compound on each subsequent dividend payment date. In the event of any liquidation, dissolution, or winding up of the affairs of the Company, holders of the Series C Preferred Stock shall be entitled to receive for each share of Series C Preferred Stock the liquidation amount plus the amount of any accrued and unpaid dividends. If we miss six quarterly dividend payments, whether or not consecutive, the Treasury will have the right to appoint two directors to our board of directors until all accrued but unpaid dividends have been paid. We cannot pay dividends on our outstanding shares of Series C Preferred Stock or our Common Stock until we have paid in full all deferred distributions on our Trust Preferred Securities.

The ability of our banking subsidiaries to pay dividends to us is limited by obligations to maintain sufficient capital and by other general restrictions on dividends that are applicable to our banking subsidiaries. If we do not satisfy these regulatory requirements, we are unable to pay dividends on our Common Stock. Holders of our Common Stock are only entitled to receive such dividends as our board of directors may declare out of funds legally available for such payments. We are subject to formal regulatory restrictions that do not permit us to declare or pay any

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dividend without the prior written approval of our banking regulators. Although we can seek to obtain a waiver of this prohibition, banking regulators may choose not to grant such a waiver, and we would not expect to be granted a waiver or be released from this obligation until our financial performance improves significantly. Therefore, we may not be able to resume payments of dividends in the future.

The Company can give no assurances that its deferred tax asset will not become impaired in the future because it is based on projections of future earnings, which are subject to uncertainty and estimates that may change based on economic conditions.

The Company can give no assurances that its deferred tax asset will not become impaired in the future. As of December 31, 2009 and 2008, the Company recorded net deferred income tax assets of approximately $56.4 million and $32.6 million, respectively. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred tax asset will not be realized. “More likely than not” is defined as greater than a 50% chance. All available evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. Management’s assessment is primarily dependent on historical taxable income and projects of future taxable income, which are directly related to the Company’s core earnings capacity and its prospects to generate core earnings in the future. Projections of core earnings and taxable income are inherently subject to uncertainty and estimates that may change given an uncertain economic outlook and current banking industry conditions. Due to the uncertainty of estimates and projections, it is possible that the Company will be required to record adjustments to the valuation allowance in future reporting periods.

Our ability to maintain adequate sources of funding may be negatively impacted by the current economic environment which may, among other things, impact our ability to resume the payment of dividends or satisfy our obligations.

Our access to funding sources in amounts adequate to finance our activities on terms which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. In managing our balance sheet, a primary source of funding is customer deposits. The amount of our certificates of deposit has decreased during 2009, primarily due to interest rate fluctuations. Our ability to continue to attract these deposits and other funding sources is subject to variability based upon a number of factors including volume and volatility in the securities markets and the relative interest rates that we are prepared to pay for these liabilities. Further, BOHR is prohibited from obtaining or renewing brokered deposits because it is not “well-capitalized.” BOHR, because it is not “well capitalized,” is further prohibited from paying rates in excess of 75 basis points above the national market average. At December 31, 2009, our total risk based capital was $44.7 million below the minimum standard for being “well-capitalized” on a consolidated basis. Our potential inability to maintain adequate sources of funding may, among other things, impact our ability to resume the payment of dividends or satisfy our obligations.

Our ability to maintain adequate sources of liquidity may be negatively impacted by the current economic environment which may, among other things, impact our ability to pay dividends or satisfy our obligations.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of investments or loans, the issuance of equity and debt securities, and other sources could have a substantial negative affect on our liquidity. Factors that could detrimentally impact our access to liquidity sources include operating losses; rising levels of non-performing assets; a decrease in the level of our business activity as a result of a downturn in the markets in which our loans or deposits are concentrated or as a result of a loss of confidence in us by our customers, lenders, and/or investors; or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial industry in light of the turmoil faced by banking organizations and the continued deterioration in credit markets. Under current market conditions, the confidence of depositors, lenders, and investors is critical to our ability to maintain our sources of liquidity.

The management of liquidity risk is critical to the management of our business and to our ability to service our customer base. In managing our balance sheet, a primary source of liquidity is customer deposits. Our ability to continue to attract these deposits and other funding sources is subject to variability based upon a number of factors

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including volume and volatility in the securities markets and the relative interest rates that we are prepared to pay for these liabilities. The availability and level of deposits and other funding sources, including borrowings and the issuance of equity and debt securities, is highly dependent upon the perception of the liquidity and creditworthiness of the financial institution, which such perception can change quickly in response to market conditions or circumstances unique to a particular company. Concerns about our financial condition or concerns about our credit exposure to other persons could adversely impact our sources of liquidity, financial position, regulatory capital ratios, results of operations, and our business prospects. If our capital ratios or liquidity position further deteriorate, we potentially face regulatory action, including a takeover of BOHR.

We sustained a large operating loss in 2009 and we may experience another loss in 2010. Our non-performing assets are at high levels and continue to rise. Our capital has been reduced by the operating loss, and we were unsuccessful in 2009 in raising additional capital. We face the possibility of entering into an agreement with regulators that may require certain actions on our part and impose certain restrictions on our activities. These factors may have an adverse impact on our sources of liquidity.

The current economic environment may negatively impact our ability to maintain required capital levels or otherwise negatively impact our financial condition, which may, among other things, limit our access to certain sources of funding and liquidity.

If the level of deposits were to materially decrease, we would have to raise additional funds by increasing the interest that we pay on certificates of deposit or other depository accounts, seek other debt or equity financing or draw upon our available lines of credit. We rely on commercial, retail, and brokered deposits as well as advances from the FHLB and the Federal Reserve discount window to fund our operations. Although we have historically been able to replace maturing deposits and advances as necessary, we might not be able to replace such funds in the future if, among other things, our results of operations or financial condition or the results of operations or financial condition of the FHLB or market conditions were to change or because we are restricted from doing so by regulatory restrictions. For example, BOHR is prohibited from obtaining brokered deposits because it is not “well-capitalized.” Additionally, the FHLB or Federal Reserve could limit our access to additional borrowings. We constantly monitor our activities with respect to liquidity and evaluate closely our utilization of our cash assets; however, there can be no assurance that our liquidity or the cost of funds to us may not be materially and adversely impacted as a result of economic, market or operational considerations that we may not be able to control.

We may face increasing deposit-pricing pressures, which may, among other things, reduce our profitability.

Deposit pricing pressures may result from competition as well as changes to the interest rate environment. Under current conditions, pricing pressures also may arise from depositors who demand premium interest rates from what they perceive to be a troubled financial institution. Current economic conditions have intensified competition for deposits. The competition has had an impact on interest rates paid to attract deposits as well as fees charged on deposit products. In addition to the competitive pressures from other depository institutions, we face heightened competition from non-depository financial products such as securities and other alternative investments. Furthermore, technology and other market changes have made it more convenient for bank customers to transfer funds for investing purposes. Bank customers also have greater access to deposit vehicles that facilitate spreading deposit balances among different depository institutions to maximize FDIC insurance coverage. In addition to competitive forces, we also are at risk from market forces as they affect interest rates. It is not uncommon when interest rates transition from a low interest rate environment to a rising rate environment for deposit and other funding costs to rise in advance of yields on earning assets. In order to keep deposits required for funding purposes, it may be necessary to raise deposit rates without commensurate increases in asset pricing in the short term. Finally, we may see interest rate pricing pressure from depositors concerned about our financial condition and levels of non-performing assets.

Historically, we have tried to maintain deposit interest rates at a competitive level without exceeding market standards. We have utilized special pricing on selected maturities of certificates of deposit and offered competitively attractive interest rates on promotional savings and money market products including a promotional money market program initiated by BOHR. The interest rates for the majority of the funds raised in this promotion are committed through June 30, 2010. If BOHR is still less than “well capitalized” at that time, BOHR would be required to reduce the interest rate to comply with the rate cap restriction discussed earlier. We could experience

25

deposit withdrawals greater than the amount we might otherwise experience if the rate cap restrictions were not in effect. Overall, however, our deposit interest costs historically have been below the average of peers. While we will continue efforts to maintain reasonable deposit interest rates, we cannot be assured of being successful in those efforts. With such competitive pressures, the possibility of rising interest rates, and potential depositor confidence issues, we are at risk of reduced profitability in order to maintain funding for our asset base.

We may continue to incur losses if we are unable to successfully manage interest rate risk.

Our profitability depends in substantial part upon the spread between the interest rates earned on investments and loans and the interest rates paid on deposits and other interest bearing liabilities. These rates are normally in line with general market rates and rise and fall based on management’s view of our needs. Changes in interest rates will affect our operating performance and financial condition in diverse ways including the pricing of securities, loans and deposits, and the volume of loan originations in our mortgage banking business. Our net interest income will be adversely affected if market interest rates change so that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments. This could in turn have a material adverse affect on the value of our Common Stock.

Certain built-in losses could be limited if we experience an ownership change, as defined in the Internal Revenue Code.

Certain of our assets may have built-in losses such as loans to the extent the basis of such assets exceeds fair market value. Section 382 of the Internal Revenue Code may limit the benefit of these built-in losses which exist at the time of an “ownership change.” A Section 382 “ownership change” occurs if a stockholder or a group of stockholders who are deemed to own at least 5% of our Common Stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. If an “ownership change” occurs, Section 382 would impose an annual limit on the amount of recognized built-in losses we can use to reduce our taxable income equal to the product of the total value of our outstanding equity immediately prior to the “ownership change” and the federal long-term tax-exempt interest rate in effect for the month of the “ownership change.” A number of special rules apply to calculating this limit. The limitations contained in Section 382 apply for a five year period beginning on the date of the “ownership change” and any recognized built-in losses that are limited by Section 382 may be carried forward and reduce our future taxable income for up to 20 years, after which they expire. If an “ownership change” were to occur, the annual limit per Section 382 could defer our ability to use some, or all, of the built-in-losses to offset taxable income.

A substantial decline in the value of our FHLB common stock may result in an “other-than-temporary” impairment charge.

We own common stock of the FHLB in order to qualify for membership in the FHLB system, which enables us to borrow funds under the FHLB advance program. The carrying value and fair market value of our FHLB common stock was approximately $19.7 million as of December 31, 2009. On January 30, 2009, the FHLB announced that in light of the other-than-temporary impairment analysis that it was still completing for the fourth quarter of 2008, it was deferring the declaration of its fourth quarter dividend. Consequently, for this and other reasons there is a risk that our investment in common stock of the FHLB could be deemed other-than-temporarily impaired at some time in the future, which would adversely affect our earnings and the value, or market for, of our Common Stock.

Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.

We face vigorous competition from other banks and other financial institutions, including savings and loan associations, savings banks, finance companies, and credit unions for deposits, loans, and other financial services that serve our market area. A number of these banks and other financial institutions are significantly larger than we are and have substantially greater access to capital and other resources, as well as larger lending limits and branch systems, and offer a wider array of banking services. Many of our non-bank competitors are not subject to the same extensive regulations that govern us. As a result, these non-bank competitors have advantages over us in providing certain services. While we believe we compete effectively with these other financial institutions serving our primary markets, we may face a competitive disadvantage to larger institutions. If we have to raise interest rates paid on deposits or lower interest rates charged on loans to compete effectively, our net interest margin and income could be negatively affected. Failure to compete effectively to attract new, or to retain existing, clients may reduce or limit our margins and our market share and may adversely affect our results of operations, financial condition, growth, and the value of our Common Stock.

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Our operations and customers might be affected by the occurrence of a natural disaster or other catastrophic event in our market area.

Because a substantial portion of our loans are with customers and businesses located in the central and coastal portions of Virginia, North Carolina, and Maryland, catastrophic events, including natural disasters such as hurricanes which historically have struck the east coast of the United States with some regularity, or terrorist attacks could disrupt our operations. Any of these natural disasters or other catastrophic events could have a negative impact on our financial centers and customer base as well as collateral values and the strength of our loan portfolio. Any natural disaster or catastrophic event affecting us could have a material adverse impact on our operations and the value of our Common Stock.

We face a variety of threats from technology based frauds and scams.

Financial institutions are a prime target of criminal activities through various channels of information technology. We attempt to mitigate risk from such activities through policies, procedures, and preventative and detective measures. In addition, we maintain insurance coverage designed to provide a level of financial protection to our business. However, risks posed by business interruption, fraud losses, business recovery expenses, and other potential losses or expenses that may be experienced from a significant event are not readily predictable and, therefore, could have an impact on our results of operations.

Virginia law and the provisions of our Articles of Incorporation, as amended, and Bylaws could deter or prevent takeover attempts by a potential purchaser of our Common Stock that would be willing to pay you a premium for your shares of our Common Stock.

Our Articles of Incorporation, as amended, and Bylaws contain provisions that may be deemed to have the effect of discouraging or delaying uninvited attempts by third parties to gain control of the Company. These provisions include the division of our board of directors into classes and the ability of our board to set the price, term, and rights of, and to issue, one or more additional series of our preferred stock. Similarly, the Virginia Stock Corporation Act contains provisions designed to protect Virginia corporations and employees from the adverse effects of hostile corporate takeovers. These provisions reduce the possibility that a third party could effect a change in control without the support of our incumbent directors. These provisions may also strengthen the position of current management by restricting the ability of shareholders to change the composition of the board, to affect its policies generally, and to benefit from actions that are opposed by the current board.

Our directors and officers have significant voting power.

As of March 25, 2010, the Company’s officers and directors beneficially owned approximately 17% of the issued and outstanding shares of the Company’s Common Stock. By voting against a proposal submitted to shareholders, the directors and officers have the ability to influence voting results for proposals requiring the approval of shareholders such as mergers, share exchanges, asset sales, and amendments to our Articles of Incorporation, as amended.

Our management has identified a material weaknesses in our internal control over financial reporting, which if not properly remediated could result in material misstatements in our future interim and annual financial statements and have a material adverse effect on our business, financial condition and results of operations and the price of our common stock.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles.

As further described in “Item 9A. Controls and Procedures,” our management has identified certain significant deficiencies in our internal control over financial reporting and our auditors have concluded that these control deficiencies constituted a “material weakness” in internal controls over financial reporting at December 31, 2009. A material weakness, as defined in the standards established by the Public Company Accounting Oversight Board (“PCAOB”), is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Although we are in the process of implementing and have already implemented certain initiatives aimed at addressing these significant deficiencies and the Company believes it has appropriately addressed the material weakness in its internal control over financial reporting, these initiatives may not remediate the material weakness. Failure to achieve and maintain an effective internal control environment could result in us not being able to accurately report our financial results, prevent or detect fraud or provide timely and reliable financial information pursuant to the reporting obligations we will have as a public company, which could have a material adverse effect on our business, financial condition and results of operations. Further, it could cause our investors to lose confidence in the financial information we report, which could adversely affect the price of our common stock.

We may be unable to recruit, motivate, and retain qualified employees.

Our success depends, in part, upon our ability to attract, motivate, and retain a sufficient number of qualified employees. Our financial condition and recent history of consecutive quarterly losses might make it difficult to attract and retain qualified employees. Our inability to recruit, motivate, and retain such individuals may result in higher employee turnover, which could have a further material adverse effect on our business, financial condition, results of operations, and cash flows. Additionally, competition for qualified employees could require us to pay higher wages and provide additional benefits to attract sufficient employees, which could result in higher labor costs.

Risks Relating to our Capital Structure and Ability to Raise Capital

Current levels of market volatility are unprecedented.

The capital and credit markets have been experiencing volatility and disruption for nearly 24 months. The volatility and disruption has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices, including the price of our Common Stock, and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience a more adverse effect on our Common Stock, our ability to access capital, and on our business, financial condition, and results of operations.

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The Company has issued three series of preferred stock that have rights that are senior to those of its common shareholders.

The Company has issued 23,266 shares of Series A Non-Convertible Non-Cumulative Perpetual Preferred Stock, no par value per share (the “Series A Preferred Stock”), 37,550 shares of Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock, no par value per share (the “Series B Preferred Stock”) and 80,347 shares of Series C Fixed Rate Cumulative Perpetual Preferred Stock, Series C, no par value per share (the “Series C Preferred Stock”). Each of these series of preferred stock of the Company ranks senior to its shares of Common Stock. As a result, the Company must make dividend payments on each series of the preferred stock before any dividends can be paid on its Common Stock and, in the event of its bankruptcy, dissolution, or liquidation, the holders of each series of the preferred stock must be satisfied before any distributions can be made on its Common Stock. The Company has the right to defer distributions on its preferred stock for any period of time, during which time no dividends may be paid on its Common Stock. The dividends declared on preferred stock will reduce the net income available to common shareholders and the Company’s earnings per common share.

If we are unable to redeem the Series C Preferred Stock prior to January 1, 2014, the cost of this capital to us will increase substantially.

If we are unable to redeem the Series C Preferred Stock prior to January 1, 2014, the cost of this capital to us will increase substantially on that date, from 5.0% (approximately $4.0 million annually) to 9.0% per annum (approximately $7.2 million annually), further reducing the net income available to holders of our Common Stock and our earnings per common share. We can give you no assurance that we will be able to redeem our Series C Preferred Stock.

Because of our participation in TARP, we are subject to several restrictions including restrictions on compensation paid to our executives.

Pursuant to the terms of the TARP, we adopted certain standards for executive compensation and corporate governance for the period during which the Treasury holds an investment in us. These standards generally apply to our five most highly compensated senior executive officers, including our Chief Executive Officer, and certain of these restrictions also apply to our twenty most highly compensated senior executives. The standards include, among other things, ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; a required claw back of any bonus or incentive compensation paid to a senior executive officer or one of the next twenty most highly compensated employees based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate; a prohibition on making golden parachute payments to senior executives; an agreement not to deduct for tax purposes annual compensation in excess of $500 thousand for each senior executive; and a limitation on bonuses. In particular, the change to the deductibility limit on executive compensation may increase the overall cost of our compensation programs in future periods and may make it more difficult to attract suitable candidates to serve as executive officers.

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Risks Relating to Market, Legislative, and Regulatory Events

Our business, financial condition, and results of operations are highly regulated and could be adversely affected by new or changed regulations and by the manner in which such regulations are applied by regulatory authorities.

Current economic conditions, particularly in the financial markets, have resulted in government regulatory agencies placing increased focus on and scrutiny of the financial services industry. The U.S. Government has intervened on an unprecedented scale, responding to what has been commonly referred to as the financial crisis. In addition to participating in Treasury’s CPP and CAP, the U.S. Government has taken steps that include enhancing the liquidity support available to financial institutions, establishing a commercial paper funding facility, temporarily guaranteeing money market funds and certain types of debt issuances, and increasing insured deposits. These programs subject us and other financial institutions who have participated in these programs to additional restrictions, oversight and/or costs that may have an impact on our business, financial condition, results of operations or the price of our Common Stock.

Compliance with such regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner. We also will be required to pay significantly higher FDIC premiums because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. The increased costs associated with anticipated regulatory and political scrutiny could adversely impact our results of operations.

New proposals for legislation continue to be introduced in the U.S. Congress that could further substantially increase regulation of the financial services industry. Federal and state regulatory agencies also frequently adopt changes to their regulations and/or change the manner in which existing regulations are applied. We cannot predict whether any pending or future legislation will be adopted or the substance and impact of any such new legislation on us. Additional regulation could affect us in a substantial way and could have an adverse effect on its business, financial condition and results of operations.

Current and future increases in FDIC insurance premiums, including the FDIC special assessment imposed on all FDIC-insured institutions, will decrease our earnings. In addition, FDIC insurance assessments will likely increase from not maintaining a well capitalized status, which would further decrease earnings.

EESA temporarily increased the limit on FDIC coverage to $250,000 for all accounts through December 31, 2013. In addition, in May of 2009, the FDIC announced that it had voted to levy a special assessment on insured institutions in order to facilitate the rebuilding of the DIF. The assessment is equal to five basis points of the Company’s total assets minus Tier 1 capital as of June 30, 2009. This represented a charge of approximately $1.4 million, which was recorded as a pre-tax charge during the second quarter of 2009. The FDIC has indicated that future special assessments are possible.

In addition, the regulatory capital ratios of BOHR decreased during the fourth quarter of 2009 below “well capitalized” status based on regulatory standards. At December 31, 2009, it satisfied the minimum regulatory capital requirements and was “adequately capitalized” within the meaning of federal regulatory requirements. FDIC insurance assessments for BOHR will likely increase due to this change in regulatory capital status. Any increases in FDIC insurance assessments would decrease our earnings.

Banking regulators have broad enforcement power, but regulations are meant to protect depositors, and not investors.

We are subject to supervision by several governmental regulatory agencies. The regulators’ interpretation and application of relevant regulations, are beyond our control, may change rapidly and unpredictably, and can be expected to influence our earnings and growth. In addition, these regulations may limit our growth and the return to our investors by restricting activities such as the payment of dividends, mergers with, or acquisitions by, other institutions, investments, loans and interest rates, interest rates paid on deposits, the use of brokered deposits, and the creation of financial centers. Although these regulations impose costs on us, they are intended to protect depositors. The regulations to which we are subject may not always be in the best interests of investors.

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The fiscal, monetary and regulatory policies of the Federal Government and its agencies could have a material adverse effect on our results of operations.

The Board of Governors of the Federal Reserve System regulates the supply of money and credit in the United States. Its policies determine, in large part, the cost of funds for lending and investing and the return earned on those loans and investments, both of which affect the net interest margin. It also can materially decrease the value of financial assets we hold, such as debt securities. Its policies also can adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans. Additionally, on June 17, 2009, Treasury released a white paper proposing sweeping financial reforms, including the creation of a Consumer Financial Protection Agency with extensive powers. If enacted, the proposals would significantly alter not only how financial firms are regulated but also how they conduct their business. Changes in Federal Reserve policies and our regulatory environment generally are beyond our control, and we are unable to predict what changes may occur or the manner in which any future changes may affect our business, financial condition and results of operation.

In addition, as a public company we are subject to securities laws and standards imposed by the Sarbanes-Oxley Act. Because we are a relatively small company, the costs of compliance are disproportionate compared with much larger organizations. Continued growth of legal and regulatory compliance mandates could adversely affect our expenses, future results of operations and the value of our Common Stock. In addition, the government and regulatory authorities have the power to impose rules or other requirements, including requirements that we are unable to anticipate, that could have an adverse impact on our results of operations and the value of our Common Stock.

There can be no assurance that recently enacted legislation will stabilize the U.S. financial system.

On October 3, 2008, President Bush signed EESA into law. The legislation was the result of a proposal by then Secretary of the Treasury Henry Paulson to the U.S. Congress in response to the financial crises affecting the banking system and financial markets and threats to investment banks and other financial institutions. Pursuant to the EESA, the Treasury has the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. On October 14, 2008, the Treasury announced the CPP, a program under the EESA pursuant to which it would make senior preferred stock investments in participating financial institutions. On October 14, 2008, the FDIC announced the development of a guarantee program under the systemic risk exception to the FDIA pursuant to which the FDIC would offer a guarantee of certain financial institution indebtedness in exchange for an insurance premium to be paid to the FDIC by issuing financial institutions (the “FDIC Temporary Liquidity Guarantee Program”). Also, on February 17, 2009, President Obama signed ARRA into law, which contains a wide array of provisions aimed at stimulating the U.S. economy.

There can be no assurance, however, as to the actual impact that the EESA, ARRA and their implementing regulations, the FDIC programs, or any other governmental program will have on the financial markets. The failure of the EESA, ARRA, the FDIC, or the U.S. government to stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations and access to credit or the trading price of our Common Stock.

The impact on us of recently enacted legislation, in particular EESA and ARRA and their implementing regulations, and actions by the FDIC, cannot be predicted at this time.

The programs established or to be established under the EESA, ARRA, and TARP may have adverse effects upon us. We may face increased regulation of our industry. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities. Also, participation in specific programs may subject us to additional restrictions. For example, participation in the TARP CPP will limit (without the consent of the Treasury) our ability to increase our dividend or to repurchase our stock for so long as any securities issued under such program remain outstanding. It will also subject us to additional executive compensation restrictions. Similarly, programs established by the FDIC under the systemic risk exception of the FDIA, whether we participate or not, may have an adverse effect on us. We do not participate in the FDIC Temporary Liquidity Guarantee Program. However, we may be required to pay significantly higher FDIC premiums even though we do not participate in the FDIC Temporary Liquidity Guarantee Program because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. The effects of participating or not participating in any such programs and the extent of our participation in such programs cannot reliably be determined at this time.

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The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. There is no assurance that any such losses would not materially and adversely affect our results of operations and the value of, or market for, our Common Stock.

ITEM 1B – UNRESOLVED STAFF COMMENTS

The Company has received no written comments regarding its periodic or current reports from the staff of the SEC that were issued 180 days or more preceding the end of its fiscal year ended December 31, 2009 and that remain unresolved.

ITEM 2 – PROPERTIES

We lease our executive offices, which are located at 999 Waterside Drive, Suite 200, Norfolk, VA 23510. The original lease was dated May 26, 2005 and includes a portion of the first floor and all of the second floor. There has been one amendment to the lease, which adds a portion of the nineteenth floor. This lease expires September 30, 2016. We operate from the locations listed below:

Accomac, VA	22349 Counsel Drive (8)	Lease
Cape Charles, VA	22468 Lankford Highway (3)	Own
Cary, NC	4725 SW Cary Parkway (10)	Own
Chapel Hill, NC	504 Meadowmont Village Center (10)	Lease
Chapel Hill, NC	421 Meadowmont Village Center (9)	Lease
Charlottesville, VA	204 Albemarle Square (3)	Lease
Charlottesville, VA	690 Berkmar Circle (9)	Lease
Chesapeake, VA	201 Volvo Parkway (3)	Own
Chesapeake, VA	852 N George Washington Highway (3)	Own
Chesapeake, VA	712 Liberty Street (3)	Own
Chesapeake, VA	4108 Portsmouth Boulevard (3)	Own
Chesapeake, VA	4720 Battlefield Boulevard (3)	Own
Chesapeake, VA	239 Battlefield Boulevard S (3)	Own
Chesapeake, VA	111 Gainsborough Square (4)	Own
Chesapeake, VA	1500 Mount Pleasant Road (3)	Lease Land/Own Building
Chesapeake, VA	1400 Kempsville Road (3)	Lease
Chesapeake, VA	1403 Greenbrier Parkway (3)	Lease
Chesapeake, VA	204 Carmichael Way (3)	Own
Chincoteauge, VA	6350 Maddox Boulevard (3)	Own

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Edenton, NC	322 S Broad Street (13)	Own
Elizabeth City, NC	112 Corporate Drive (6)	Own
Elizabeth City, NC	1145 North Road Street (14)	Lease Land/Own Building
Elizabeth City, NC	1404 West Ehringhaus Street (3)	Own
Elizabeth City, NC	400 West Ehringhaus Street (4)	Own
Elizabeth City, NC	961-A Oak Stump Road (2)	Lease
Emporia, VA	520 South Main Street (3)	Own
Emporia, VA	100 Dominion Drive (3)	Own
Exmore, VA	4071 Lankford Highway (3)	Own
Greenville, NC	204 East Arlington Boulevard (9)	Lease
Hertford, NC	147 North Church Street (2)	Own
Kitty Hawk, NC	3600 Croatan Highway (4)	Own
Kitty Hawk, NC	5406 North Croatan Highway (14)	Lease Land/Own Building
Midlothian, VA	13804 Hull Street (3)	Own
Moyock, NC	100 Moyock Commons Drive (4)	Own
Nags Head, NC	2808 South Croatan Highway (5)	Lease
Newport News, VA	749A Thimble Shoals Boulevard (11)	Lease
Newport News, VA	753 Thimble Shoals Boulevard (2)	Lease
Norfolk, VA	4500 East Princess Anne Road (3)	Own
Norfolk, VA	539 West 21st Street (10)	Lease
Norfolk, VA	500 Plume Street East (3)	Lease
Norfolk, VA	4037 East Little Creek Road (3)	Lease
Norfolk, VA	999 Waterside Drive, Suite 101(3)	Lease
Norfolk, VA	999 Waterside Drive 2nd Floor (6)	Lease
Norfolk, VA	999 Waterside Drive, Suite 1925 (6)	Lease
Onley, VA	25253 Lankford Highway (10)	Lease Land/Own Building
Onley, VA	25020 Shore Parkway (6)	Own
Parksley, VA	18426 Dunne Avenue (3)	Own
Plymouth, NC	433 US Highway 64 East (4)	Own
Pocomoke City, MD	103 Pocomoke Marketplace (3)	Lease
Raleigh, NC	8470 Falls of Neuse Road (10)	Own
Raleigh, NC	2235 Gateway Access Point (10)	Own
Richmond, VA	5300 Patterson Avenue (10)	Own
Richmond, VA	2730 Buford Road (3)	Own
Richmond, VA	8209 West Broad Street (3)	Own
Richmond, VA	12090 West Broad Street (3)	Own
Roper, NC	102 West Buncombe Street (3)	Own
Salisbury, MD	1503 South Salisbury Boulevard (3)	Own
Salisbury, MD	100 West Main Street (3)	Own
Suffolk, VA	117 Market Street (3)	Own
Suffolk, VA	2825 Godwin Drive (10)	Own
Virginia Beach, VA	5472 Indian River Road (3)	Own
Virginia Beach, VA	1100 Dam Neck Road (3)	Own
Virginia Beach, VA	713 Independence Boulevard (3)	Lease
Virginia Beach, VA	1580 Laskin Road (12)	Lease Land/Own Building
Virginia Beach, VA	641 Lynnhaven Parkway (7)	Own
Virginia Beach, VA	3801 Pacific Avenue (3)	Lease
Virginia Beach, VA	2098 Princess Anne Road (10)	Lease Land/Own Building
Virginia Beach, VA	3001 Shore Drive (3)	Lease
Virginia Beach, VA	1316 North Great Neck Road (3)	Lease
Virginia Beach, VA	281 Independence Bouelvard (3)	Lease
Wake Forest, NC	152 Capcom Avenue (3)	Lease
Wilmington, NC	901 Military Cutoff Road (10)	Own

(1) Includes banking, investment brokerage, and insurance services

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(2) Insurance services only

(3) Banking services only

(4) Banking and insurance services

(5) Banking and investment brokerage services

(6) Operations center

(7) Banking and title insurance services

(8) Investment brokerage services only

(9) Loan production office

(10) Banking and mortgage services

(11) Title services

(12) Banking, investment, and mortgage services

(13) Banking, insurance, and mortgage services

(14) Banking, investment, insurance, and mortgage services

All of our properties are in good operating condition and are adequate for our present and anticipated future needs.

ITEM 3 – LEGAL PROCEEDINGS

In the ordinary course of our operations, we may become party to legal proceedings. Currently, we are not party to any material legal proceedings.

ITEM 4 – REMOVED AND RESERVED

PART II

ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Price of Common Stock and Dividend Payments

Market Information

Our Common Stock began trading on the NASDAQ Global Select Market under the symbol “HMPR” on September 12, 2007. Prior to listing on the NASDAQ Global Select Market, our Common Stock traded on the NASDAQ Capital Market starting August 3, 2006, and before that, on the Over-the-Counter Bulletin Board, a NASDAQ sponsored and operated inter-dealer quotation system for equity securities. The following table sets forth for the periods indicated the high and low prices per share of our Common Stock as reported on the NASDAQ Global Select Market along with the quarterly cash dividends per share declared. Per share prices do not include adjustments for markups, markdowns, or commissions.

					Cash Dividend Declared
	Sales Price
	High		Low
2009
First Quarter	$	9.50	$	5.96	$	0.11
Second Quarter		9.90		7.20		0.11
Third Quarter		7.98		2.72		—
Fourth Quarter		2.70		1.67		—
2008
First Quarter	$	12.45	$	9.50	$	0.11
Second Quarter		13.92		9.51		0.11
Third Quarter		13.00		10.07		0.11
Fourth Quarter		12.00		6.25		0.11

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Number of Shareholders of Record

As of March 25, 2010, we had 22,153,594 shares of Common Stock outstanding, which were held by 4,910 shareholders of record. In addition, we had approximately 4,600 beneficial owners who own their shares through brokers.

Dividend Policy

Dividends paid are limited by the requirement to meet capital guidelines issued by regulatory authorities, and future declarations are subject to financial performance and regulatory requirements. During 2008 and the first half of 2009, the Company paid cash dividends of $0.11 per share on a quarterly basis. Due to net losses incurred in 2009, on July 30, 2009, the Board of Directors voted to suspend the quarterly dividend on the Company Common Stock in order to preserve capital and liquidity. Our ability to distribute cash dividends in the future may be limited by negative regulatory restrictions and the need to maintain sufficient consolidated capital. On October 30, 2009, the Company announced that it had suspended its Series A and B Preferred dividend as an additional method to preserve capital and liquidity.

In addition, the Company announced on November 17, 2009 that it had notified the Treasury of its intent to defer the payment of its regular quarterly cash dividends on its Series C Preferred Stock issued to the Treasury in connection with the Company’s participation in the Treasury’s TARP CPP. Under the terms of the Series C Preferred Stock, the Company is required to pay on a quarterly basis a dividend rate of 5% per year for the first five years, after which the dividend rate automatically increases to 9% per year. Dividend payments may be deferred, but the dividend is a cumulative dividend and failure to pay dividends for six dividend periods would trigger board appointment rights for the holder of the Series C Preferred Stock.

Because the Company previously suspended quarterly dividend payments to holders of the Series A Preferred Stock and Series B Preferred Stock, it is required under applicable law to defer dividends on the Series C Preferred Stock. However, because the Series C Preferred Stock dividend is cumulative, the dividend has been accrued.

The primary source of funds for dividends paid to our shareholders is the dividends received from our subsidiaries. Our Banks are subject to laws and regulations that limit the amount of dividends that they can pay. Under Virginia law, a bank may not declare a dividend in excess of its undivided profits. In addition, our bank subsidiaries may not declare a dividend if the total amount of all dividends, including the proposed dividend, declared by the respective bank in any calendar year exceeds the total of that bank’s year to date retained net income, combined with its retained net income of the two preceding years, unless the dividend is approved by the Federal Reserve. Our Banks may not declare or pay any dividend if, after making the dividend, the bank would be “undercapitalized,” as defined in the banking regulations.

All classes of preferred stock are in a superior ownership position compared to Common Stock. Dividends must be paid to the preferred stockholder before they can be paid to the common stockholder. The Company has issued 23,266 shares of Series A Preferred Stock, 37,550 shares of Series B Preferred Stock and 80,347 shares of Series C Preferred Stock. The Company must make dividend payments on each series of the preferred stock before any dividends can be paid on its Common Stock and, in the event of its bankruptcy, dissolution, or liquidation, the holders of each series of the preferred stock must be satisfied before any distributions can be made on its Common Stock. The Company has the right to defer distributions on its preferred stock for any period of time, during which time no dividends may be paid on its Common Stock. The dividends declared on the Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock will reduce the net income available to common shareholders and the Company’s earnings per common share. Additionally, the ownership interest of the existing holders of Common Stock will be diluted to the extent the warrant the Company issued to the Treasury in conjunction with the sale to the Treasury of the Series C Preferred Stock is exercised. Although the Treasury has agreed not to vote any of the shares of Common Stock it receives upon exercise of the warrant, a transferee of any portion of the warrant or of any shares of Common Stock acquired upon exercise of the warrant is not bound by this restriction.

34

The securities purchase agreement between the Company and Treasury provides that prior to the earlier of (i) December 31, 2011 or (ii) the date on which all of the shares of the Series C Preferred Stock have been redeemed by the Company or transferred by the Treasury to third parties, the Company may not, without the consent of the Treasury, (a) increase the cash dividend on its Common Stock or (b) subject to limited exceptions, redeem, repurchase, or otherwise acquire shares of its Common Stock or preferred stock other than the Series C Preferred Stock or Trust Preferred Securities. In addition, the Company is unable to pay any dividends on its Common Stock unless it is current in its dividend payments on the Series C Preferred Stock. The Company is prevented from paying dividends on its preferred stock and Common Stock until its financial condition improves.

Additionally, the Federal Reserve and the Bureau of Financial Institutions have the general authority to limit the dividends paid by insured banks if the payment is deemed an unsafe and unsound practice. Both the Federal Reserve and the Bureau of Financial Institutions have indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsound and unsafe banking practice.

We are also subject to certain federal regulatory requirements to maintain capital at or above regulatory minimums. These regulatory requirements regarding capital affect our dividend policies. Banking regulators have indicated that banking organizations should generally pay dividends only if the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality, and overall financial condition.

Performance Graph

The graph below presents five-year cumulative total return comparisons through December 31, 2009, in stock price appreciation and dividends for our Common Stock, the Standard & Poor’s 500 Total Return Index (“S & P 500”), Keefe, Bruyette, & Woods 50 Total Return Index (“KBW 50”), and the SNL Securities index including banks between $1 billion and $5 billion in total assets (“SNL $1B-$5B Bank Index”). Returns assume an initial investment of $100 at the market close on December 31, 2004 and reinvestment of dividends. SNL $1B-$5B Bank Index was added for year-end 2009 as it is a more relevant index on which to base our Company. We plan to use the SNL $1B-$5B Bank Index in future filings because we believe it contains more issuers from our direct peer group than the KBW 50 index. Values as of each year-end of the $100 initial investment are shown in the following table and graph.

35

	Period Ending
Index	12/31/2004	12/31/2005	12/31/2006	12/31/2007	12/31/2008	12/31/2009
Hampton Roads Bankshares, Inc.	100.00	94.79	111.68	120.84	87.57	17.88
KBW 50	100.00	101.46	121.17	94.74	49.69	48.81
S&P 500	100.00	104.91	121.48	128.16	80.74	102.11
SNL Bank $1B - $5B	100.00	98.29	113.74	82.85	68.72	49.26

Recent Sales of Unregistered Securities

On November 20, 2009, we sold unregistered shares of Common Stock to the officers and directors of the Company identified below.

Purchaser	Number of Shares Received	Total Consideration Paid
Patrick E. Corbin	44,843.05	$	100,000.00
John A. B. Davies, Jr.	44,843.05		100,000.00
Bobby L. Ralph	2,242.15		5,000.00
Roland C. Smith, Sr.	44,843.05		100,000.00

The consideration paid by was the consolidated closing bid price of the Common Stock on that date, $2.23 per share. All sales were made pursuant to Rule 506 of Regulation D. Each of these sales was deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) and Rule 506 of the Securities Act of 1933 as transactions by an issuer not involving a public offering.

In addition, on December 30, 2009, John A. B. Davies, Jr. received a fully-vested 25,000 share award of restricted Common Stock as an inducement for joining the Company. This award was deemed to be exempt from registration under the Securities Act in reliance on Rule 701 promulgated thereunder.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The Company announced an open ended program on August 13, 2003 by which management was authorized to repurchase an unlimited number of the Company’s shares of Common Stock in the open market and through privately negotiated transactions. During 2009, the Company repurchased a total of 69,820 shares of its Common Stock. The Company did not repurchase any shares of Common Stock other than through this publicly announced plan. Details for the transactions conducted during the last quarter of 2009 appear below.

	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet be Purchased Under the  Plans or Programs
October 1, 2009 - October 31, 2009	—	$	—	—	—
November 1, 2009 - November 30, 2009	—		—	—	—
December 1, 2009 - December 31, 2009	82.49		1.75	82.49	—
Total	82.49	$	1.75	82.49	—

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ITEM 6 – SELECTED FINANCIAL DATA

The Selected Financial Data on page 2 in the excerpts from the Annual Report for the year ended December 31, 2009 is incorporated herein by reference.

ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 3 through 36 in the excerpts from the Annual Report for the year ended December 31, 2009 is incorporated herein by reference.

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information on the Quantitative and Qualitative Disclosures About Market Risk included in the Interest Rate Sensitivity section on pages 30 through 31 in the excerpts from the Annual Report for the year ended December 31, 2009 is incorporated herein by reference.

Other than freestanding derivatives associated with interest rate lock commitments on mortgage loans which the Company intends to sell in the secondary market, we had no derivative financial instruments, foreign currency exposure, or trading portfolio as of December 31, 2009.

ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements of the Company and the Report of Independent Registered Public Accounting Firm set forth on pages 37 through 82 in the excerpts from the Annual Report for the year ended December 31, 2009 are incorporated herein by reference or as noted and included as part of this Form 10-K:

	Page in the excerpts from the Annual Report
Consolidated Balance Sheets December 31, 2009 and 2008	34
Consolidated Statements of Operations Years Ended December 31, 2009, 2008, and 2007	35
Consolidated Statements of Changes in Shareholders’ Equity - Years Ended December 31, 2009, 2008, and 2007	36
Consolidated Statements of Cash Flows Years Ended December 31, 2009, 2008, and 2007	37
Notes to Consolidated Financial Statements December 31, 2009, 2008, and 2007	39-80

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

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ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A – CONTROLS AND PROCEDURES

The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, including, without limitation, that such information is accumulated and communicated to Company management, including the Company’s principal executive and financial officer, as appropriate, to allow timely decisions regarding required disclosures.

Evaluation of Disclosure Controls and Procedures. The Company, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2009. Among other factors in its evaluation, the Company considered the underlying reasons for the material weakness in internal control over financial reporting described below. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of December 31, 2009, the Company’s disclosure controls and procedures were not effective to provide reasonable assurance that material information is recorded, processed, summarized, and reported by management of the Company on a timely basis in order to comply with the Company’s disclosure obligations under the Exchange Act and the rules and regulations promulgated thereunder. This conclusion regarding the Company’s disclosure controls and procedures is based solely on management’s conclusion that the Company’s internal control over financial reporting is ineffective.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

Management’s Report on Internal Control Over Financial Reporting. Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and board of directors regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. Based on this assessment, management believes that, as of December 31, 2009, the Company’s internal control over financial reporting was ineffective based on those criteria.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

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Management has evaluated the severity of each deficiency, individually and in aggregate and the effectiveness of mitigating controls and has determined material weaknesses exist with the controls over financial reporting. The areas in which these deficiencies existed are summarized as follows:

• Inadequate controls over the accounting for income taxes. The Company lacked sufficient personnel with adequate technical skills related to accounting for income taxes. This deficiency resulted in misstatements in the Company’s preliminary consolidated financial statements. These errors were corrected by management in the Company’s consolidated financial statements as of and for the year ended December 31, 2009, included in this Annual Report.

• Ineffective controls over the accounting for certain loan transactions. Specifically, the Company lacked adequate controls over accounting for loans or partial loans sold to other institutions and accounting for payments and accrual of interest on certain nonaccrual loans. . With regard to accounting for loans or partial loans sold to other institutions, management determined personnel lacked adequate knowledge in accounting for these matters. With regard to accounting for payments and accrual of interest on certain nonaccrual loans, management determined that it lacked sufficient procedures to determine whether these loan payments were properly processed. Errors that resulted from accounting for certain loan transactions were corrected by management in the Company’s consolidated financial statements as of and for the year ended December 31, 2009, included in this Annual Report, within an amount that was deemed to be immaterial.

• Ineffective controls and procedures related to certain information technology applications and general computer controls. The Company did not maintain adequate controls to prevent unauthorized access to certain programs and data, and provide for periodic review and monitoring of access including analysis of segregation of duties conflicts.

• Weaknesses within the area of Human Resources were identified including inadequate controls over access to payroll data and a lack of procedures to review payroll changes and reconcile payroll data to supporting documentation.

Remediation Plan

Management is committed to continuing efforts to improve the design and operation of the Company’s internal controls, including taking all necessary steps to remediate the material weaknesses identified above. The Company’s ongoing efforts to strengthen controls in response to the deficiencies noted above include:

• To remediate the weaknesses with respect to accounting for income taxes, the Company began in the fourth quarter of 2009, utilizing outsourced service providers with specific expertise in this area to assist current personnel. The Company intends to continue utilizing such service providers until it is able to hire personnel with the necessary income tax qualifications and experience.

• To remediate the weaknesses with respect to accounting for certain loan transactions, the Company will review on a regular basis, payments recorded on nonaccrual loans. Additionally, the Company intends to train or hire accounting personnel to increase the staff’s expertise in loan accounting. The deficiencies with respect to accounting for loans or partial loans sold to other institutions have been corrected.

• In response to the weaknesses within information technology, the Company has engaged an outside information technology consultant to assist personnel in designing and maintaining effective controls and procedures over IT applications. Management will continue to monitor the information technology area and assess the progress towards remediation.

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• In connection with correcting the weaknesses within Human Resources, the Company has, during first quarter of 2010:

1. Modified user access to payroll data based on the employees’ responsibilities,

2. implemented procedures for the review of payroll changes by appropriate personnel, and

3. established controls for the reconciliation of payroll data to the Company’s financial records on a routine basis.

Through these steps, the Company believes it is appropriately addressing the material weakness in its internal control over financial reporting disclosed above.

Changes in Internal Control over Financial Reporting. The only changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2009 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting, are summarized above in the discussion of the material weakness in internal control over financial reporting, as well as the related remediation plan. The Company expects the changes related to the remediation plan to materially affect and improve its internal control over financial reporting.

ITEM 9B – OTHER INFORMATION

On December 10, 2009, the Company held a special meeting of its common shareholders (the “Special Meeting”). Two proposals were voted on at the Special Meeting. The shareholders approved a proposal to amend the Company’s Amended and Restated Articles of Incorporation to increase the amount of Common Stock authorized for issuance by 30,000,000 shares, from 70,000,000 to 100,000,000 shares. 14,524,229 shares voted in favor of this proposal, 1,541,590 shares voted against this proposal, and 91,646 shares abstained. There were 4,535,043 broker non-votes.

In addition, in accordance with NASDAQ rule 5635, the Company’s shareholders approved a proposal to grant its Series A Preferred and Series B Preferred shareholders the right to exchange preferred stock for Common Stock. 10,745,311 shares voted in favor of this proposal, 844,711 shares voted against this proposal, and 50,400 shares abstained. We have decided not to move forward with the proposal at this time.

PART III

ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

Information concerning our directors, executive officers, their compliance with Section 16(a), and corporate governance required by this Item is incorporated by reference from our Proxy Statement for the Annual Meeting of Shareholders (“2010 Proxy Statement”). In addition, information respect to our audit committee financial expert required by this Item is incorporated herein by reference from our Proxy Statement.

Code of Ethical Conduct

The Company has adopted a Code of Ethical Conduct that applies to our Chief Executive Officer (“CEO”) and executive and senior financial officers, including our Chief Financial Officer (“CFO”), Chief Accounting Officer (“CAO”), Senior Vice President of Accounting, Controller, Corporate Treasurer, Internal Audit members, any person Assistant Vice President and above in an Accounting / Financial position, Senior Financial Analyst, any Regulation O Executive Officers along with any person serving in an equivalent position regardless of whether or not they are designated as executive officers for Regulation O purposes, or any persons serving in equivalent positions within the Company. The Code of Ethical Conduct is included as Exhibit 14. Any changes in or waivers from our Code of Ethical Conduct applicable to the CEO and executive or senior financial officer shall be promptly disclosed through a filing with the FDIC on Form 8-K. We provide this information on our Website, www.bankofhamptonroads.com, under Investor Relations, as incorporated in this filing. A copy can also be obtained through written communications addressed to Neal A. Petrovich, Chief Financial Officer, Hampton Roads Bankshares, Inc., 999 Waterside Drive, Suite 200, Norfolk, VA 23510.

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ITEM 11 – EXECUTIVE COMPENSATION

Information concerning executive compensation required by this Item will appear in the 2010 Proxy Statement, which is incorporated herein by reference.

ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information concerning security ownership of certain beneficial owners and management and related stockholder matters required by this Item will appear in the 2010 Proxy Statement, which is incorporated herein by reference.

A summary of the information related to our existing equity compensation plans as of December 31, 2009, is given below:

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants, and rights	Weighted average exercise price of outstanding options, warrants, and rights		Number of securities remaining  available for future issuance under equity compensation plans
Equity compensation plans approved by security holders	1,420,213	$	12.60	786,535
Equity compensation plans not approved by security holders	—		—	—
Total	1,420,213	$	12.60	786,535

Equity compensation plans approved by security holders include 74,124 stock options acquired through the SFC merger and 685,772 stock options acquired through the GFH merger.

The Compensation Committee of the board of directors adopted the 2006 Stock Incentive Plan on March 14, 2006. This plan was approved by the shareholders on April 25, 2006. The 2006 Stock Incentive Plan superseded a stock incentive plan adopted in 1993, although the 1993 plan remains in effect.

ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Information concerning certain relationships and related transactions and director independence required by this Item will appear in the 2010 Proxy Statement, which is incorporated herein by reference.

ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES

Information concerning principal accountant fees and services required by this item will appear in the 2010 Proxy Statement, which is incorporated herein by reference.

PART IV

ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this report.

(1) Financial Statements – The following documents are included in the 2009 Annual Report to Shareholders and are incorporated by reference in this report:

Report of Independent Registered Public Accounting Firm

41

Management’s Report on Internal Control

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Changes in Shareholder’s Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

(2) Financial Statement Schedules – All financial statement schedules required by Item 8 and Item 15 of Form 10-K have been omitted because the information requested is not required, not applicable, or is shown in the Consolidated Financial Statements or Notes thereto.

(3) Exhibits – See Exhibit Index, which is incorporated in this item by reference.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Hampton Roads Bankshares, Inc.
April 19, 2010	/s/ John A. B. Davies, Jr.
Date	John A. B. Davies, Jr.
	President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

SIGNATURE	CAPACITY	DATE
/s/ John A. B. Davies, Jr.	President, Chief Executive	April 23, 2010
John A. B. Davies, Jr.	Officer, and Director
	(Principal Executive Officer)
/s/ Neal A. Petrovich	Executive Vice President	April 23, 2010
Neal A. Petrovich	and Chief Financial Officer
	(Principal Financial Officer)
/s/ Lorelle L. Fritsch	Senior Vice President and	April 23, 2010
Lorelle L. Fritsch	Chief Accounting Officer
	(Principal Accounting Officer)
/s/ Emil A. Viola	Chairman of the Board	April 23, 2010
Emil A. Viola
/s/ Douglas J. Glenn	Director, Executive Vice	April 23, 2010
Douglas J. Glenn	President, Chief Operating
	Officer, and General Counsel
	Director	April 23, 2010
William Brumsey, III
/s/ Patrick E. Corbin	Director	April 23, 2010
Patrick E. Corbin
	Director	April 23, 2010
Henry P. Custis, Jr.
	Vice Chairman	April 23, 2010
Herman A. Hall, III

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	Director	April 23, 2010
Richard F. Hall, III
/s/ Robert R. Kinser	Director	April 23, 2010
Robert R. Kinser
	Director	April 23, 2010
William A. Paulette
/s/ Bobby L. Ralph	Director	April 23, 2010
Bobby L. Ralph
	Director	April 23, 2010
Billy G. Roughton
/s/ Jordan E. Slone	Director	April 23, 2010
Jordan E. Slone
/s/ Roland Carroll Smith, Sr.	Director	April 23, 2010
Roland Carroll Smith, Sr.
/s/ Ollin B. Sykes	Director	April 23, 2010
Ollin B. Sykes
	Director	April 23, 2010
Frank T. Williams
/s/ W. Lewis Witt	Director	April 23, 2010
W. Lewis Witt
/s/ Jerry T. Womack	Director	April 23, 2010
Jerry T. Womack

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Exhibit Index

Hampton Roads Bankshares, Inc.

3.1	Amended and Restated Articles of Incorporation of Hampton Roads Bankshares, Inc., attached as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated December 16, 2009, incorporated herein by reference.
3.2	Bylaws of Hampton Roads Bankshares, Inc., as amended, attached as Exhibit 3.4 to the Registrant’s Current Report on Form 8-K dated September 24, 2009, incorporated herein by reference.
4.1	Specimen of Common Stock Certificate, attached as Exhibit 4.1 to the Registrant’s Annual Report on Form10-K for the year ended December 31, 2005, incorporated herein by reference.
4.2	Form of Certificate for the Series C Preferred Stock, incorporated by reference from the Registrant’s Form 8-K, filed January 5, 2009.
4.3	Warrant for Purchase of Shares of Common Stock, incorporated by reference from the Registrant’s Form 8-K, filed January 5, 2009.
4.4	Letter Agreement, dated December 31, 2008, by and between Hampton Roads Bankshares, Inc. and the United States Department of the Treasury, incorporated by reference from the Registrant’s Form 8-K, filed January 5, 2009.
10.1	Supplemental Retirement Agreement, dated as of March 31, 1994, attached as Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1993, incorporated herein by reference.
10.2	Employment Agreement, dated as of March 28, 1988, between the Registrant and Jack Gibson, attached as Exhibit 7 of the Form F-l, incorporated herein by reference.
10.3	First Amendment to Employment Agreement, dated as of February 1, 1997, between the Registrant and Jack Gibson, attached as Exhibit 10.11 to the Registrant’s Annual Report on Form 10-KSB, incorporated herein by reference.
10.4	Third Amendment to Employment Agreement, dated as of June 24, 2003, between the Registrant and Jack Gibson, attached as Exhibit 10.24 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003, incorporated herein by reference.
10.5	Amendment No. One to the Supplemental Retirement Agreement, dated as of December 9, 2003, between the Registrant and Jack Gibson, attached as Exhibit 99.4 to the Registrant’s Current Report on Form S-K dated June 27, 2006, incorporated herein by reference.
10.6	Fourth Amendment to Employment Agreement by and between Hampton Roads Bankshares, Inc. and Jack W. Gibson, dated as of May 27, 2008, attached as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated June 2, 2008, incorporated herein by reference.
10.7	Amendment No. 2 to the Supplemental Retirement Agreement between Bank of Hampton Roads and Jack W. Gibson, dated May 27, 2008, attached as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K dated June 2, 2008, incorporated herein by reference.
10.8	Director Retirement Plan, dated as of November 28, 2006, attached as Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K dated March 1, 2008, incorporated herein by reference.
10.9	Employment Agreement, dated as of November 1, 2007, between the Registrant and Douglas J. Glenn, attached as Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K dated March 11, 2008, incorporated herein by reference.

45

10.10	First Amendment to the Employment Agreement between Hampton Roads Bankshares, Inc. and Douglas J. Glenn, dated as of May 27, 2008, attached as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated June 2, 2008, incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, incorporated herein by reference.
10.11	Supplemental Retirement Agreement between BOHR and Douglas J. Glenn, dated May 27, 2008, attached as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K dated June 2, 2008, incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, incorporated herein by reference.
10.12	Credit Agreement between Compass Bank and Hampton Roads Bankshares, Inc., dated May 29, 2008, attached as Exhibit 10.6 to the Registrant’s Current Report on Form 8-K dated June 2, 2008, incorporated herein by reference.
10.13	Pledge Agreement between Compass Bank and Hampton Roads Bankshares, Inc., dated May 29, 2008, attached as Exhibit 10.7 to the Registrant’s Current Report on Form 8-K dated June 2, 2008, incorporated herein by reference.
10.14	Employment Agreement, dated as of August 28, 2006, between Hampton Roads Bankshares, Inc. and Lorelle L. Fritsch, attached as Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, incorporated herein by reference.
10.15	First Amendment to the Employment Agreement between Hampton Roads Bankshares, Inc. and Lorelle L. Fritsch, dated as of July 23, 2008, attached as Exhibit 10.36 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, incorporated herein by reference.
10.16	BOHR Supplemental Executive Retirement Plan, dated as of January 1, 2005, attached as Exhibit 99.5 to the Registrant’s Current Report on Form 8-K dated June 27, 2006, incorporated herein by reference.
10.17	First Amendment to BOHR Supplemental Executive Retirement Plan, dated as of December 30, 2008, attached as Exhibit 10.38 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, incorporated herein by reference.
10.18	Second Amendment to the BOHR Supplemental Executive Retirement Plan, dated as of December 30, 2008, attached as Exhibit 10.39 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, incorporated herein by reference.
10.19	Hampton Roads Bankshares, Inc. 2008 Director Deferred Compensation Plan dated as of January 1, 2008, attached as Exhibit 10.40 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, incorporated herein by reference.
10.20	Amended and Restated Hampton Roads Bankshares, Inc. Directors’ Deferred Compensation Plan, attached as Exhibit 10.41 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, incorporated herein by reference.
10.21	Hampton Roads Bankshares, Inc. Executive Savings Plan, dated as of July 23, 2006, attached as Exhibit 4 to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-139968) dated January 12, 2007, incorporated herein by reference.
10.22	First Amendment to Hampton Roads Bankshares, Inc. Executive Savings Plan, dated as of December 30, 2008, attached as Exhibit 10.43 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, incorporated herein by reference.
10.23	Second Amendment to Hampton Roads Bankshares, Inc. Executive Savings Plan, dated as of December 30, 2008, attached as Exhibit 10.44 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, incorporated herein by reference.
10.24	Hampton Roads Bankshares, Inc. Executive Savings Plan Trust, dated as of July 23, 2006, attached as Exhibit 10.45 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, incorporated herein by reference.
10.25	Hampton Roads Bankshares, Inc. 2006 Stock Incentive Plan, dated as of March 14, 2006, attached as Exhibit 10.1 to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-134583) dated May 31, 2006, incorporated herein by reference.
10.26	First Amendment to Hampton Roads Bankshares, Inc. 2006 Stock Incentive Plan, dated as of December 26, 2008, attached as Exhibit 10.47 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, incorporated herein by reference.

46

10.27	Non-Qualified Limited Stock Option Plan for Directors and Employees, dated March 31, 1994, attached as Exhibit 10.6 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1994, incorporated herein by reference.
10.28	Dividend Reinvestment and Optional Cash Purchase Plan Prospectus, dated as of March 14, 2002, attached as Exhibit 99.1 to the Registrant’s Registration Statement on Form S-3 dated March 14, 2002, incorporated herein by reference.
10.29	Amended and Restated Dividend Reinvestment and Optional Cash Purchase Plan Prospectus, dated as of July 23, 2008, included in Registrant’s Prospectus on Form 424B3 filed August 15, 2008, incorporated herein by reference.
10.30	Supplement No. 1 to Amended and Restated Dividend Reinvestment and Optional Cash Purchase Plan Prospectus, dated as of January 27, 2009, included in Registrant’s Prospectus on Form 424B3 filed March 4, 2009, incorporated herein by reference.
10.31	Gateway Financial Holdings, Inc. 2005 Omnibus Stock Ownership and Long-Term Incentive Plan, attached as Exhibit 4.2 to Gateway Financial Holdings, Inc.’s Registration Statement on Form S-8 (Registration No. 333-127978) dated August 31, 2005, incorporated herein by reference.
10.32	Gateway Financial Holdings, Inc. 2001 Nonstatutory Stock Option Plan, attached as Exhibit 4.2 to Gateway Financial Holdings, Inc.’s Registration Statement on Form S-8 (Registration No. 333-98021) dated August 13, 2002, incorporated herein by reference.
10.33	Gateway Financial Holdings, Inc. 1999 Incentive Stock Option Plan, attached as Exhibit 4.2 to Gateway Financial Holdings, Inc.’s Registration Statement on Form S-8 (Registration No. 333-98025) dated August 13, 2002, incorporated herein by reference.
10.34	Gateway Financial Holdings, Inc. 1999 Nonstatutory Stock Option Plan, attached as Exhibit 4.2 to Gateway Financial Holdings, Inc.’s Registration Statement on Form S-8 (Registration No. 333-98027) dated August 13, 2002, incorporated herein by reference.
10.35	Gateway Financial Holdings, Inc. 1999 BOR Stock Option Plan, attached as Exhibit 4.2 to Gateway Financial Holdings, Inc.’s Registration Statement on Form S-8 (Registration No. 333-144841) dated July 25, 2007, incorporated herein by reference.
10.36	Shore Financial Corporation 2001 Stock Incentive Plan, attached as Exhibit 99 to Shore Financial Corporation’s Registration Statement on Form S-8 (Registration No. 333-82838) dated February 15, 2002, incorporated herein by reference.
10.37	Shore Savings Bank, F.S.B. 1992 Stock Option Plan dated November 10, 1992, attached as Exhibit 10 to Shore Financial Corporation’s Registration Statement on Form S-4EF dated September 15, 1997, incorporated herein by reference.
10.38	Employment Agreement between Hampton Roads Bankshares, Inc. and David Twiddy, attached as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K, dated January 7, 2009, incorporated herein by reference.
10.39	Employment Agreement between Hampton Roads Bankshares, Inc. and John A. B. Davies, Jr., attached as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, dated July 30, 2009, incorporated herein by reference.
13.1	Excerpts from the Annual Report for the year ended December 31, 2009, except to the extent incorporated by reference, is being furnished for informational purposes only and is not deemed to be filed as part of the Report on Form 10-K.
14.1	The Company has a Code of Ethics for its senior financial officers and the Chief Executive Officer. Any waivers of, or amendments to, the Code of Ethics will be disclosed through the timely filing of a Form 8-K with the SEC. A copy of the Company’s Code of Ethics can be obtained through written communications addressed to Neal A. Petrovich, 999 Waterside Dr., Suite 200, Norfolk, VA 23510.

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21.1	A list of the subsidiaries of Hampton Roads Bankshares, Inc., filed herewith.
23.1	Consent of Yount, Hyde, and Barbour, P.C., filed herewith.
31.1	The Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer, filed herewith.
31.2	The Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer, filed herewith.
32.1	Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, filed herewith.
99.1	TARP Certification of Chief Executive Officer, filed herewith.
99.2	TARP Certification of Chief Financial Officer, filed herewith.

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EX-13.1

Exhibit 13.1

2009 Annual Report

Table of Contents

Selected Financial Data	2
Management’s Discussion and Analysis of Financial Condition and Results of Operations	3
Consolidated Balance Sheets	37
Consolidated Statements of Operations	38
Consolidated Statements of Changes in Shareholders’ Equity	39
Consolidated Statements of Cash Flows	40
Notes to Consolidated Financial Statements	42

Selected Financial Data

The financial information presented below has been derived from our audited consolidated financial statements. This information is only a summary and should be read together with our consolidated historical financial statements and management’s discussion and analysis appearing elsewhere in this annual report.

(dollars in thousands except share and per share data)	2009			2008			2007			2006			2005
Operating Results:
Interest income	$	149,445		$	45,177		$	38,203		$	30,021		$	24,558
Interest expense		44,294			17,917			14,016			9,123			5,869
Net interest income		105,151			27,260			24,187			20,898			18,689
Provision for loan losses		134,223			1,418			1,232			180			486
Noninterest income		22,325			5,980			3,440			3,398			3,214
Noninterest expense		170,795			20,987			15,994			14,946			13,040
Income taxes (benefit)		(32,075	)		3,660			3,590			3,134			2,870
Net income (loss)		(145,467	)		7,175			6,811			6,036			5,507
Preferred stock dividend and accretion of discount		8,689			—			—			—			—
Net income (loss) available to common shareholders	$	(154,156	)	$	7,175		$	6,811		$	6,036		$	5,507
Per Common Share Data:
Basic earnings (loss)	$	(7.07	)	$	0.60		$	0.67		$	0.66		$	0.68
Diluted earnings (loss)		(7.07	)		0.59			0.65			0.65			0.66
Book value		2.08			9.70			7.14			6.84			5.96
Tangible book value		1.50			5.18			7.14			6.84			5.96
Basic weighted average shares outstanding		21,816,407			11,960,604			10,228,638			9,092,980			8,137,244
Diluted weighted average shares outstanding		21,816,407			12,074,725			10,431,554			9,275,788			8,407,821
Shares outstanding at year end		22,154,320			21,777,937			10,314,899			10,251,336			8,242,822
Year-End Balances:
Assets	$	2,975,558		$	3,085,711		$	563,828		$	476,299		$	409,517
Loans		2,426,692			2,599,526			477,149			375,044			285,330
Investment securities		190,841			177,432			47,081			59,545			73,826
Deposits		2,495,040			2,296,146			431,457			363,261			327,447
Borrowings		277,469			429,588			53,000			38,000			30,500
Shareholders’ equity		180,996			344,809			73,660			70,163			49,131
Average Balances:
Assets	$	3,072,474		$	759,264		$	519,175		$	432,716		$	382,821
Loans		2,561,685			646,211			428,874			325,506			287,979
Investment securities		162,298			41,711			53,946			67,130			52,706
Deposits		2,325,606			562,390			389,055			333,242			302,167
Borrowings		397,616			94,101			51,336			36,968			30,944
Shareholders’ equity		316,381			94,030			71,545			57,640			44,855
Ratios:
Return on average assets		(4.73	)%		0.95	%		1.31	%		1.39	%		1.44	%
Return on average common equity		(84.93	)		7.63			9.52			10.47			12.28
Average equity to average assets		10.30			12.38			13.78			13.32			11.72
Allowance for loan losses to year end loans		5.47			1.97			1.06			1.04			1.26
Net interest margin		3.95			3.89			4.95			5.20			5.26
Dividend payout ratio		NM			73.33			64.18			75.76			52.94
Efficiency ratio		138.63			64.02			57.89			61.52			59.54

NM - Not Meaningful

2

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

Introduction

Hampton Roads Bankshares, Inc. (the “Company”) is a bank holding company that was formed in 2001 and is headquartered in Norfolk, Virginia. The Company’s primary subsidiaries are Bank of Hampton Roads (“BOHR”), which opened for business in 1987, and Shore Bank (“Shore”), which opened in 1961. The Banks engage in general community and commercial banking business, targeting the needs of individuals and small- to medium-sized businesses. Currently, BOHR operates twenty-eight banking offices in the Hampton Roads region of southeastern Virginia and twenty-four offices throughout Virginia and North Carolina doing business as Gateway Bank & Trust Co. (“Gateway”). Shore serves the Eastern Shore of Maryland and Virginia through eight banking offices. Through various affiliates, the Banks also offer mortgage banking services, insurance, title insurance, and investment products. Unless the context otherwise requires, the terms the “Company,” “we,” “us,” or “our” are used to refer to Hampton Roads Bankshares, Inc. and our consolidated subsidiaries on a combined basis.

We acquired Shore Financial Corporation and Subsidiaries (“SFC”) on June 1, 2008, and therefore, the financial information discussed throughout the Management Discussion and Analysis includes the operations of Shore and Shore Investments Inc., for the seven months ended December 31, 2008 and throughout 2009. Our acquisition of Gateway Financial Holdings, Inc. and Subsidiaries (“GFH”) occurred on December 31, 2008; accordingly, the Company’s consolidated financial statements only include ending balance information, excluding GFH’s results from operations, during 2008 and a full year of operations during 2009.

With the acquisition of GFH, the Company acquired non-banking sources of noninterest income. As a result, the Company has four non-banking subsidiaries: Gateway Insurance Services, Inc., which sells insurance products to businesses and individuals; Gateway Investment Services, Inc., which assists customers with their securities brokerage activities through an arrangement with an unaffiliated broker-dealer; Gateway Bank Mortgage, Inc., which provides mortgage banking services with products which are primarily sold on the secondary market; and Gateway Title Agency, Inc., which engages in title insurance and settlement services for real estate transactions.

The following commentary provides information about the major components of our results of operations, financial condition, liquidity, and capital resources. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements presented elsewhere in this Annual Report. It should also be read in conjunction with the “Caution About Forward Looking Statements” section at the end of this discussion.

Executive Overview

In 2009, economic conditions in the markets in which our borrowers operate continued to deteriorate and the levels of loan delinquency and defaults that we experienced were substantially higher than historical levels. The Company reported a significant net loss for fiscal 2009, primarily a result of a significant adjustment to our provision for loan losses, the complete write-down of our goodwill asset related to our acquisitions of SFC and GFH, and a loss on investments due to other-than-temporary impairment charges on available-for-sale securities. In light of the current economic environment, significant additional provisions for loan losses may be necessary to supplement the allowance for loan losses in the future. As a result, we may incur significant credit costs in 2010, which would continue to adversely impact our financial condition and results of operations.

As of December 31, 2009, the Company and BOHR were “adequately capitalized” under applicable banking regulations; Shore Bank was “well-capitalized.” As a result, the Company is in the process of attempting to raise the additional capital necessary to become “well-capitalized” at all levels.

The acquisition of SFC added approximately $220.5 million in loans and $208.4 million in deposits to our balance sheet upon acquisition. The acquisition also generated approximately $27.9 million in goodwill. Due primarily to deteriorating economic conditions and in accordance with applicable accounting rules and guidance, the entire goodwill amount was determined to be impaired and was charged against income in the second quarter of 2009.

3

Because the acquisition of GFH was completed at the end of 2008, GFH’s results are included in the income statement, average balances, and related metrics beginning in 2009. GFH’s assets and liabilities are included, at fair value, in the consolidated balance sheet beginning on December 31, 2008, but not in 2008 averages. At the time of acquisition, GFH added approximately $1.8 billion in loans and $1.7 billion in deposits to the balance sheet. Those amounts represented approximately 69% of loans and 74% of deposits of the consolidated Company at year-end 2008. The acquisition also generated $56.9 million in goodwill. In the fourth quarter of 2009, it was determined that the GFH goodwill was impaired and the entire amount was charged against income. In addition, as discussed later, our problem loans increased significantly in 2009; loans acquired from GFH have been the primary source of that increase. Deteriorating economic conditions, difficulties in loan administration, and insufficient loan collection resources contributed to the credit quality problems. We have taken remedial action to address the internal issues, which are addressed in later sections of this report.

Our primary source of revenue is net interest income earned by our bank subsidiaries. Net interest income represents interest and fees earned from lending and investment activities, less the interest paid on deposits and borrowings. Net interest income may be impacted by variations in the volume and mix of interest earning assets and interest bearing liabilities, changes in the yields earned and the rates paid, level of non-performing interest earning assets, and the level of noninterest bearing liabilities available to support earning assets. Our net interest income was negatively impacted by increasing levels of non-performing loans during 2009. In addition to net interest income, noninterest income is another important source of revenue. Noninterest income is derived primarily from service charges on deposits and fees earned from bank services. With the addition of SFC and GFH, fees earned from investment, mortgage, and insurance activities also represent a significant component of noninterest income. Other factors that impact net income are the provision for loan losses, noninterest expense, and the provision for income taxes.

The following is a summary of our condition and financial performance as of December 31, 2009.

• Assets were $3.0 billion. They decreased by $110.2 million or 4% from December 31, 2008. The decrease in assets was primarily associated with a $172.8 million decrease in loans, an $81.5 million increase in our allowance for loan losses, and a $85.5 million decrease in goodwill and other intangible assets, offset by an increase of $138.7 million in overnight funds sold and due from Federal Reserve Bank (“FRB”).

• Investment securities available-for-sale increased $11.4 million to $161.1 million from December 31, 2008. The increase was the result of our investing some of the funds obtained from the increase in our deposits into pledgable interest earning securities. The investment portfolio was restructured during 2009 to increase regulatory capital ratios by selling higher risk-weighted securities and reinvesting the proceeds into securities that would favor our regulatory capital ratios.

• Loans decreased by $172.8 million or 7% and deposits increased by $198.9 million or 9% for 2009 from December 31, 2008. The decrease in loans was attributed to pay downs and maturities of loans that exceeded new loans originated during 2009. Additionally, new loan demand was low during this period due to general economic conditions. The increase in deposits was attributed to an increase in interest bearing demand deposits and time deposits less than $100 thousand. A money market promotional campaign contributed significantly to the increase in interest bearing demand deposits.

• Net loss available to common shareholders for 2009 was $154.2 million or $7.07 per common diluted share as compared with net income available to common shareholders of $7.2 million or $0.59 per common diluted share for comparative 2008. The primary reasons for the loss in 2009 were an increase in the allowance for loan losses of $81.5 million due to additional reserves necessary for resolving problem credits as loan quality has deteriorated due to the slow economy, declining real estate values in some markets, and goodwill impairment charges of $84.8 million in 2009 related to the SFC and GFH acquisitions.

• The net interest margin was 3.95% in 2009 compared to 3.89% and 4.95% in 2008 and 2007, respectively. Favorable reductions in interest expense due to the amortization of fair value adjustments generated in the acquisitions of SFC and GFH affected the 2009 net interest margin.

4

• Net interest income increased $77.9 million to $105.2 million for the year ended December 31, 2009 as compared to the same period 2008. The increase was due primarily to the increase of net interest income from loans acquired in the SFC and GFH acquisitions in 2008.

• Noninterest income for the period ended December 31, 2009 was $22.3 million, a 273% increase over comparative 2008. This was largely due to the addition of the non-banking subsidiaries through our acquisition of GFH, gain on the sale of investment securities, and the increase in service charges and fees that resulted from the SFC and GFH acquisitions. Noninterest income was reduced during 2009 by an extinguishment of debt charge and other-than-temporary impairment charges to foreclosed real estate and securities.

• Noninterest expense was $170.8 million for the period ended December 31, 2009, which was an increase of $149.8 million or 714% over the comparable period for 2008. The increase was attributed largely to the addition of noninterest expenses in all categories resulting from the SFC and GFH acquisitions, increases in FDIC insurance including a one-time special assessment leveled at all financial institutions, and goodwill impairment charges of $84.8 million.

• Our effective tax rate decreased to (18.07%) in 2009 compared to 33.78% for comparative 2008. The change in our effective tax rate for 2009 was primarily due to the fact that the $84.8 million impairment of goodwill charge is not deductible for income tax purposes, thus our income tax benefit was negatively impacted.

Material Trends

The global and U.S. economies continue to experience a protracted slowdown in business activity as a result of disruptions, including a lack of confidence in the worldwide credit markets and in the financial system. Currently, the U.S. economy remains in the midst of one of its longest economic recessions in recent history. It is not clear at this time what ultimate impact U.S. Government programs such as the Troubled Asset Relief Program (“TARP”) Capital Purchase Program (“TARP CPP” or “CPP”) and other liquidity and funding initiatives of the Federal Reserve System will have on the financial markets, the U.S. banking and financial industries, the broader U.S. and global economies, and, more importantly, the local economies in the markets that we serve.

Partially as a result of the economy and partially due to our credit practices and administration, we experienced a significant deterioration in credit quality in 2009. Problem loans and non-performing assets rose throughout the year and led us to significantly increase the allowance for loan losses. To bolster our allowance, we increased the provision for loan losses to $134.2 million from $1.4 million in 2008. The increased expense contributed to a net loss available to common shareholders of $154.2 million in 2009. In light of continued economic weakness, problem credits may continue to rise and significant additional provisions for loan losses may be necessary to supplement the allowance for loan losses in the future. As a result, we may incur significant credit costs in 2010, which would continue to adversely impact our financial condition, our results of operations, and the value of our common stock.

Critical Accounting Policies

U.S. generally accepted accounting principles are complex and require management to apply significant judgment to various accounting, reporting, and disclosure matters. Management must use assumptions, judgments, and estimates when applying these principles where precise measurements are not possible or practical. These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions, and estimates. Changes in such judgments, assumptions, and estimates may have a significant impact on the consolidated financial statements. Actual results, in fact, could differ from those estimates.

5

Allowance for Loan Losses

The allowance for loan losses reflects the estimated losses resulting from the inability of our borrowers to make required loan payments. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that collection of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.

The allowance is based on two basic principles of accounting: (i) Accounting Standards Codification (“ASC”) 450, Contingencies, which requires that losses be accrued when occurrence is probable and can be reasonably estimated and (ii) ASC 310-40, Receivables, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows, or values that are observable in the secondary market and the loan balance. The allowance is an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectability of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, credit concentrations, trends in historical loss experience, and current economic conditions.

The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are determined to be impaired. We evaluate for impairment loans classified with a risk rating of “Substandard” or worse with balances of $150,000 and greater, loans that are classified as troubled debt restructurings, and nonaccrual loans. A loan is impaired when it is probable the creditor will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Impaired loans are measured based on the present value of payments expected to be received using the historical effective loan rate as the discount rate. Alternatively, the measurement also may be based on observable market prices or, for loans that are solely dependent on the collateral for repayment, the measurement may be based on the net realizable fair value of the collateral. With regard to housing price depreciation and homeowners’ loss in the equity of collateral, we rely upon appraisals to substantiate collateral values. In addition, we have developed a matrix to adjust the value of differing types of properties depending on the length of time since the most recent appraisal was received. The adjustment factors range from 0% to 35% and were based upon published statistics. We also take into consideration the markets where the properties are located and apply higher or lower range values depending on specific market conditions. In the event that the borrower’s financial strength and the collateral are not sufficient to support the loan value, the loan is treated as impaired and the shortfall is factored into the allowance for loan losses calculation as a specific reserve.

The general component covers loans not designated for a specific allowance and is based on historical loss experience adjusted for qualitative factors. To arrive at the general component the loan portfolio is grouped by loan type. Each loan type is further subdivided by risk levels as determined in our loan grading process. A weighted average historical loss rate is computed for each group of loans over the trailing thirty-six months with higher weightings assigned to the most recent months. Beginning in 2009, the historical loss factor included historical losses of Hampton Roads Bankshares (“HRB”) and GFH on a combined basis. In addition, an adjustment factor is applied. The adjustment factor represents management’s judgment that inherent losses in a given group of loans are different from historical loss rates due to environmental factors unique to that specific group of loans. These factors may relate to:

• Growth rate factors within the particular loan group;

• Whether the recent loss history for a particular group of loans differs from its historical loss rate;

• Amount of loans in a particular group that have recently been designated as impaired and that may be indicative of future trends for this group;

• Reported or observed difficulties that other banks are having with loans in the particular group;

• Changes in the experience, ability, and depth of lending personnel;

• Changes in the nature and volume of the loan portfolio and in the terms of loans; and

• Changes in the volume and severity of past due loans, nonaccrual loans, and adversely classified loans.

6

The sum of the historical loss rate and the adjustment factor comprise the estimated annual loss rate. To adjust for risk levels, a loss allocation factor is estimated based on the segmented risk levels for the loan group and is keyed off of a pass credit rating. The loss allocation factor is applied to the estimated annual loss rate to determine the expected annual loss amount. Additionally, we apply an economic factor to recognize external forces over which management has no control and to estimate inherent losses that may otherwise be omitted from the allowance calculation. The factors used in this calculation include published data for the gross domestic product growth rate, interest rate levels, as measured by the prime rate, and regional unemployment statistics.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio and represents inherent losses that may not otherwise be captured in the specific or general components.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets with an indefinite life are subject to impairment testing at least annually or more often if events or circumstances, such as legal factors, business climate, unanticipated competition, changes in regulatory environment, or loss of key personnel, suggest potential impairment. Other acquired intangible assets determined to have a finite life are amortized over their estimated useful life in a manner that best reflects the economic benefits of the intangible asset. Intangible assets with a finite life are periodically reviewed for other-than-temporary impairment.

Financial Accounting Standards Board (“FASB”) ASC 350, Intangibles – Goodwill and Other, identifies a two-step impairment test that should be used to test for impairment and measure the amount of the impairment loss to be recognized. The first step involves comparing the fair value of the reporting unit with the carrying value of the reporting unit. The fair value of a reporting unit is computed using one or a combination of the following three methods: income method, market value, or cost method. The income method uses a discounted cash flow analysis to determine fair value by considering a reporting unit’s capital structure and applying a risk-adjusted discount rate to forecast earnings based on a capital asset pricing model. The market value method uses recent transaction analysis or publicly traded comparable analysis for similar assets and liabilities to determine fair value. The cost method assumes the net assets of a recent business combination accounted for under the purchase method of accounting will be recorded at fair value if no event or circumstance has occurred triggering a decline in the value. To the extent a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired, and a second step of impairment testing will be performed. In the second step, the implied fair value of the reporting unit’s goodwill is determined by allocating the reporting unit’s fair value to all its assets (recognized and unrecognized) and liabilities as if the reporting unit had been acquired in a business combination at the date of the impairment test. If the implied fair value of reporting unit goodwill is lower than its carrying amount, goodwill is impaired and is written down to its implied fair value. The loss recognized is limited to the carrying amount of goodwill. Once an impairment loss is recognized, future increases in fair value will not result in the reversal of previously recognized losses.

Deferred Income Taxes

Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carry forwards, and deferred tax liabilities are measures using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred income tax expense (benefit) represents the change during the period in the deferred tax assets and deferred tax liabilities.

We use the asset and liability method in accounting for income taxes. This method recognizes the amount of taxes payable or refundable for the current year and recognizes deferred tax liabilities and assets for the expected future tax consequences of events and transactions that have been recognized in our financial statements or tax returns.

7

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Realization of the deferred income tax asset is dependent on generating sufficient taxable income in the future years, and, as such, material changes would impact our financial condition and results of operations.

Estimates of Fair Value or Financial Instruments

We use fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. Investment securities available-for-sale and derivative loan commitments are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans, foreclosed real estate and repossessed assets, goodwill, and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

When developing fair value measurements, we maximize the use of observable inputs and minimize the use of unobservable inputs. When available, we use quoted prices in active markets to measure fair value. If quoted prices in active markets are not available, fair value measurement is based upon quoted prices for similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. However, in certain cases, when market observable inputs for model-based valuation techniques may not be readily available, we are required to make judgments about assumptions market participants would use in estimating the fair value of the financial instrument.

The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted prices in active markets or observable market parameters. For financial instruments with quoted market prices or observable market parameters in active markets, there is minimal subjectivity involved in measuring fair value. When quoted prices and observable data in active markets are not fully available, management judgment is necessary to estimate fair value. Changes in the market conditions, such as reduced liquidity in the capital markets or changes in secondary market activities, may reduce the availability and reliability of quoted prices or observable data used to determine fair value. When significant adjustments are required to price quotes or inputs, it may be appropriate to utilize an estimate based primarily on unobservable inputs. When an active market for a financial instrument does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, adjusted for an appropriate risk premium, is acceptable.

In connection with the first quarter 2009 adoption of the new fair value measurement guidance included in ASC 820, Fair Value Measurements and Disclosures, we developed policies and procedures to determine when markets for our financial assets and liabilities are inactive if the level and volume of activity has declined significantly relative to normal conditions. If markets are determined to be inactive, it may be appropriate to adjust price quotes received. The methodology we use to adjust the quotes generally involves weighing the price quotes and results of internal pricing techniques, such as the net present value of future expected cash flows (with observable inputs, where available) discounted at a rate of return market participants require to arrive at the fair value. The more active and orderly markets for particular security classes are determined to be, the more weight we assign to price quotes; whereas, the less active and orderly markets are determined to be, the less weight we assign to price quotes.

Significant judgment may be required to determine whether certain assets measured at fair value are included in Level 2 or Level 3. When making this judgment, we consider all available information, including observable market data, indications of market liquidity and orderliness, and our understanding of the valuation techniques and significant inputs used. For securities in inactive markets, we use a predetermined percentage to evaluate the impact of fair value adjustments derived from weighing both external and internal indications of value to determine if the instrument is classified as Level 2 or Level 3. Otherwise, the classification of Level 2 or Level 3 is based upon the specific facts and circumstances of each instrument or instrument category and judgments are made regarding the significance of the Level 3 inputs to the instruments’ fair value measurement in its entirety. If Level 3 inputs are considered significant, the instrument is classified as Level 3.

8

Analysis of Results of Operations

During 2009, we incurred a net loss available to common shareholders of $154.2 million, compared with net income available to common shareholders of $7.2 million for 2008. The net loss in 2009 was largely attributable to $84.8 million in goodwill impairment charges related to the SFC and GFH acquisitions and $134.2 million in provision for loan losses expense, which was necessary to increase reserves for potential loan losses due to the slow economy and declining real estate values. Diluted loss per common share was $7.07 for 2009, a decrease of $7.66 over the diluted earnings per common share of $0.59 for 2008.

Net Interest Income

Net interest income, a major component of our earnings, is the difference between the income generated by interest-earning assets reduced by the cost of interest-bearing liabilities. The net interest margin, defined as net interest income as a percentage of average earning assets, was 3.95%, 3.89%, and 4.95% in 2009, 2008, and 2007, respectively. Net interest income and net interest margin may be significantly impacted by variations in the volume and mix of interest earning assets and interest bearing liabilities, changes in the yields earned and rates paid, and the level of noninterest bearing liabilities available to support earning assets. Our management team strives to maximize net interest income through prudent balance sheet administration, maintaining appropriate risk levels as determined by our Asset and Liability Committee (“ALCO”) and the Board of Directors.

Table 1 presents the average interest earning assets and average interest bearing liabilities, the average yields earned on such assets and rates paid on such liabilities, and the net interest margin for the indicated periods. The variance in interest income and expense caused by differences in average balances and rates is shown in Table 2.

9

Table 1: Average Balance Sheet and Net Interest Margin Analysis

	2009						2008						2007
(in thousands)	Average Balance		Interest Income/ Expense		Average Yield/ Rate		Average Balance		Interest Income/ Expense		Average Yield/ Rate		Average Balance		Interest Income/ Expense		Average Yield/ Rate
Assets:
Interest earning assets
Loans	$	2,418,983	$	142,969	5.91	%	$	646,211	$	43,201	6.69	%	$	428,874	$	35,604	8.30	%
Investment securities		162,298		6,339	3.91	%		41,711		1,677	4.02	%		53,946		2,316	4.29	%
Interest-bearing deposits in other banks		14,104		38	0.27	%		9,632		246	2.55	%		4,870		248	5.09	%
Overnight funds sold and due from FRB		67,962		99	0.15	%		3,030		53	1.75	%		691		35	5.07	%
Total interest earning assets		2,663,347		149,445	5.61	%		700,584		45,177	6.45	%		488,381		38,203	7.82	%
Noninterest earning assets		409,127						58,680						30,794
Total assets		3,072,474						759,264						519,175
Liabilities and Shareholders’ Equity:
Interest bearing liabilities
Interest bearing demand deposits		666,545		7,512	1.13	%		81,014		1,030	1.27	%		40,863		678	1.66	%
Savings deposits		111,177		1,110	1.00	%		88,559		1,741	1.97	%		79,994		2,866	3.58	%
Time deposits		1,289,638		27,393	2.12	%		282,150		11,321	4.01	%		168,886		8,113	4.80	%
Total interest bearing deposits		2,067,360		36,015	1.74	%		451,723		14,092	3.12	%		289,743		11,657	4.02	%
Borrowings		397,616		8,279	2.08	%		94,101		3,825	4.06	%		51,336		2,359	4.60	%
Total interest bearing liabilities		2,464,976		44,294	1.80	%		545,824		17,917	3.28	%		341,079		14,016	4.11	%
Noninterest bearing liabilities
Demand deposits		258,246						110,667						99,312
Other liabilities		32,871						8,743						7,239
Total noninterest bearing liabilities		291,117						119,410						106,551
Total liabilities		2,756,093						665,234						447,630
Shareholders’ equity		316,381						94,030						71,545
Total liabilities and shareholders’ equity	$	3,072,474					$	759,264					$	519,175
Net interest income			$	105,151					$	27,260					$	24,187
Net interest spread					3.81	%					3.17	%					3.71	%
Net interest margin					3.95	%					3.89	%					4.95	%

Note: Interest income from loans included fees of $1,121 in 2009, $817 in 2008, and $1,414 in 2007. Average nonaccrual loans of $142,702 are excluded from average loans for 2009. Average nonaccrual loans for 2008 and 2007 were not material and are included in average loans above.

10

Table 2: Effect of Changes in Rate and Volume on Net Interest Income

	2009 Compared to 2008								2008 Compared to 2007
	Interest Income/ Expense			Variance Attributable  to					Interest Income/ Expense			Variance Attributable  to
(in thousands)	Variance			Rate			Volume		Variance			Rate			Volume
Interest Earning Assets:
Loans	$	99,768		$	(4,427	)	$	104,195	$	7,597		$	(4,741	)	$	12,338
Investment securities		4,662			(46	)		4,708		(639	)		(140	)		(499	)
Interest-bearing deposits in other banks		(208	)		(433	)		225		(2	)		1			(3	)
Overnight funds sold and due from FRB		46			(2	)		48		18			(4	)		22
Total interest earning assets		104,268			(4,908	)		109,176		6,974			(4,884	)		11,858
Interest Bearing Liabilities:
Deposits		21,923			(3,088	)		25,011		2,435			(1,636	)		4,071
Borrowings		4,454			(792	)		5,246		1,466			(236	)		1,702
Total interest bearing liabilities		26,377			(3,880	)		30,257		3,901			(1,872	)		5,773
Net interest income	$	77,891		$	(1,028	)	$	78,919	$	3,073		$	(3,012	)	$	6,085

Note: The change in interest due to both rate and volume has been allocated to variance attributable to rate and variance attributable to volume in proportion to the relationship for the absolute amounts of change in each.

2009 Compared to 2008

Net interest income was $105.2 million during the year ended December 31, 2009, representing an increase of $77.9 million or 286% as compared with 2008. The 2009 increase in net interest income resulted from growth in average loans of $1.8 billion from 2008 to 2009, largely the result of loans acquired in the GFH merger. Additionally, we benefited from a 148 basis point decrease in the average rate paid on interest bearing liabilities from 3.28% in 2008 to 1.80% in 2009. Also, favorable reductions in interest expense due to the amortization of fair value adjustments generated in the acquisitions of SFC and GFH in the amount of $13.3 million impacted 2009 net interest income. Net interest income was negatively affected by a decline in the average yield on interest earning assets from 6.45% in 2008 to 5.61% in 2009. These changes in average yield and rate produced a net interest spread which increased from 3.17% in 2008 to 3.81% in 2009.

The net interest margin, which is calculated by expressing net interest income as a percentage of average interest earning assets, is an indicator of effectiveness in generating income from earning assets. Our net interest margin was 3.95% in 2009 compared to 3.89% in 2008. In calculating net interest margin for the year ended 2009, average nonaccrual loans of $142.7 million were excluded from interest earning assets.

Our interest earning assets consist primarily of loans, investment securities, interest-bearing deposits in other banks, and overnight funds sold and due from FRB. Interest income on loans, including fees, increased $99.8 million to $143.0 million for the year ended December 31, 2009 compared to the same time period during 2008. This increase resulted from a $1.8 billion increase in average interest earning loans and was partially offset by a 78 basis point decline in the average yield on loans. Interest income on investment securities increased $4.7 million to $6.3 million for the year ended December 31, 2009, compared to the same time period during 2008. This increase was due to a $120.6 million increase in average investment securities, largely attributable to the GFH acquisition. The increase was partially offset by an 11 basis point reduction in the average yield on investment securities from 2008 to 2009. Interest income on interest-bearing deposits in other banks decreased $208 thousand from 2008 to 2009. This decrease was primarily the result of a 228 basis point decrease in the average interest yield. Interest income on overnight funds sold increased $46 thousand for the year ended December 31, 2009 compared to the same period ended 2008. This decrease was largely due to a 160 basis point decrease experienced in the average interest yield of average overnight funds sold.

11

Our interest bearing liabilities consist of deposit accounts and borrowings. Interest expense on deposits increased $21.9 million to $36.0 million for the year ended December 31, 2009 compared to the same time period during 2008. This increase resulted from a $1.6 billion increase in average interest bearing deposits, largely due to the GFH acquisition, offset by a 138 basis point decrease in the average interest rate on deposits. This decrease in our average deposit rates resulted in large part from declining rates on certificates of deposits and other deposits coupled with reductions in interest expense due to the amortization of fair value adjustments generated in the acquisitions of SFC and GFH. These factors contributed significantly toward a reduction of our average rate on time deposits from 4.01% in 2008 to 2.12% in 2009. Interest expense on borrowings, which consisted of Federal Home Loan Bank (“FHLB”) borrowings, other borrowings, and overnight funds purchased increased $4.5 million to $8.3 million for the year ended December 31, 2009 compared to the same time period during 2008. The $303.5 million increase in average borrowings netted against a 198 basis point decrease in the average interest rate on borrowings produced this result.

2008 Compared to 2007

Net interest income was $27.3 million during the year ended December 31, 2008, representing an increase of $3.1 million or 13% as compared with 2007. The 2008 increase in net interest income resulted from growth in interest earning assets during the period, primarily due to the SFC merger. Additionally, we benefited from an 83 basis point decrease in the average rate paid on interest bearing liabilities from 4.11% in 2007 to 3.28% in 2008. Net interest income was negatively affected by a decline in the average yield on interest earning assets from 7.82% in 2007 to 6.45% in 2008. These changes in average yield and rate produced a net interest spread which compressed from 3.71% in 2007 to 3.17% in 2008.

The net interest margin was 3.89% in 2008, compared to 4.95% in 2007. The Federal Open Market Committee’s 500 - 525 basis point reduction in the target federal funds rate since September 2007 put continued downward pressure on interest rates which negatively impacted our asset sensitive balance sheet, resulting in the decline in the net interest margin.

Interest income on loans, including fees, increased $7.6 million to $43.2 million for the year ended December 31, 2008 compared to the same time period during 2007. This increase resulted from a $217.3 million increase in average loans and was partially offset by a 161 basis point decline in the average yield on loans. The merger valuation adjustment of SFC’s loan portfolio, which is being amortized over approximately thirty-eight months beginning in June 2008, reduced interest income on loans by $221 thousand in 2008. Interest income on investment securities decreased $639 thousand to $1.7 million for the year ended December 31, 2008 compared to the same time period during 2007. We experienced a $12.2 million decline in average investment securities, primarily resulting from maturing investments used to fund other liquidity needs and the existence of a relatively unfavorable investment security market during the year. Interest income on interest-bearing deposits in other banks and overnight funds sold had a nominal impact on our interest income during 2008 and 2007.

Interest expense from deposits increased $2.4 million to $14.1 million for the year ended December 31, 2008 compared to the same time period during 2007. This increase resulted from the $162.0 million increase in average interest bearing deposits offset by a 90 basis point decrease in the average interest rate on deposit liabilities. The merger valuation adjustment of certain SFC deposits, being amortized over eleven months beginning June 2008, decreased interest expense on deposits by $341 thousand in 2008. Interest expense from borrowings increased $1.5 million to $3.8 million for the year ended December 31, 2008 compared to the same time period during 2007. The $42.8 million increase in average borrowings netted against the 54 basis point decrease in the average interest rate on borrowings produced this result. The merger valuation adjustment of SFC’s borrowings, being amortized over fourteen months beginning in June 2008, decreased interest expense on borrowings by $173 thousand in 2008.

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Noninterest Income

Table 3: Noninterest Income

(in thousands)									2009 Compared to 2008					2008 Compared to 2007
	2009			2008			2007		$			%		$			%
Service charges on deposit accounts	$	8,117		$	3,379		$	1,996	$	4,738		140	%	$	1,383		69	%
Mortgage banking revenue		4,642			—			—		4,642		—			—		—
Gain on sale of investment securities		4,274			457			—		3,817		835	%		457		—
Gain (loss) on sale of premises and equipment		(29	)		519			11		(548	)	(106	)%		508		4618	%
Extinguishment of debt charge		(1,962	)		—			—		(1,962	)	—			—		—
Other-than-temporary impairment
of foreclosed real estate		(1,043	)		—			—		(1,043	)	—			—		—
of securities		(2,469	)		(561	)		—		(1,908	)	340	%		(561	)	—
Insurance revenue		4,901			—			—		4,901		—			—		—
Brokerage revenue		354			—			—		354		—			—		—
Income from bank owned life insurance		1,658			—			—		1,658		—			—		—
Visa check card income		1,810			541			285		1,269		235	%		256		90	%
ATM surcharge fees		406			213			210		193		91	%		3		1	%
Other		1,666			1,432			938		234		16	%		494		53	%
Total noninterest income	$	22,325		$	5,980		$	3,440	$	16,345		273	%	$	2,540		74	%

2009 Compared to 2008

As shown in Table 3, we reported an increase in total noninterest income of $16.3 million or 273% in 2009 over 2008. Noninterest income comprised 13% of total revenue in 2009 and 12% in 2008. Our largest source of noninterest income is service charges on deposit accounts which increased $4.7 million or 140% to $8.1 million for the year ended December 31, 2009 compared to the same period in 2008. The increase was primarily attributed to service charges on the accounts acquired with the SFC and GFH mergers. Additionally, as part of the GFH merger, we acquired mortgage, insurance, and brokerage subsidiaries; revenue from these operations was $4.6 million, $4.9 million, and $354 thousand, respectively. We had no such income during 2008. We incurred an extinguishment of debt charge during 2009 of $2.0 million on the early payoff of two FHLB advances. In order to restructure our investment portfolio to lower our risk weighted assets for regulatory capital ratio purposes during 2009, we sold securities with higher risk weights and reinvested in securities with lower risk weights. We generated gains on sales of investment securities of $4.3 million in 2009 and $457 thousand in 2008. The deteriorating economy during 2009 caused other-than-temporary impairments in our foreclosed real estate and investment securities portfolios and impairment charges of $1.0 million and $2.5 million, respectively, were incurred during 2009 and included as a reduction to noninterest income. Other-than-temporary impairment of securities of $561 thousand was incurred during 2008.

2008 Compared to 2007

We reported an increase in total noninterest income of $2.5 million or 74% in 2008 over 2007. Service charges on deposit accounts increased $1.4 million or 69% to $3.4 million for the year ended December 31, 2008 compared to the same period in 2007. The addition of SFC represented $1.2 million of the increase to service charges on deposit accounts. During the first and third quarters of 2008, we sold investment securities available-for-sale and recorded a gain of $457 thousand. Gain on sale of premises and equipment primarily consisted of a gain recorded on the sale of a property originally intended for expansion prior to relocating the corporate headquarters. During 2008, equity securities originally owned by SFC were deemed to be other-than-temporarily impaired and an impairment loss of $561 thousand was recognized through noninterest income. Other service charges and fees increased $494 thousand or 53% during 2008 compared to 2007. Contributing to this increase was a gain from the sale of our credit card portfolio as well as the introduction of a non sufficient funds (“NSF”) protection product that generates fees in return for honoring NSF checks up to a predetermined limit.

13

Noninterest Expense

Table 4: Noninterest Expense

(in thousands)							2009 Compared to 2008					2008 Compared to 2007
	2009		2008		2007		$			%		$		%
Salaries and employee benefits	$	42,285	$	11,518	$	9,954	$	30,767		267	%	$	1,564	16	%
Occupancy		9,044		2,261		1,668		6,783		300	%		593	36	%
Data processing		5,368		1,189		612		4,179		351	%		577	94	%
Impairment of goodwill		84,837		—		—		84,837		—			—	—
FDIC insurance		5,661		262		42		5,399		2061	%		220	524	%
Equipment		4,735		663		343		4,072		614	%		320	93	%
Professional fees		2,883		383		279		2,500		653	%		104	37	%
Amortization of intangible assets		2,546		365		—		2,181		598	%		365	—
Bank franchise tax		1,922		621		464		1,301		210	%		157	34	%
Telephone and postage		1,599		481		305		1,118		232	%		176	58	%
Directors’ and regional board fees		1,020		443		307		577		130	%		136	44	%
Stationery, printing, and office supplies		894		229		168		665		290	%		61	36	%
Advertising and marketing		888		412		326		476		116	%		86	26	%
ATM and VISA check card		293		551		500		(258	)	47	%		51	10	%
Other		6,820		1,609		1,026		5,211		324	%		583	57	%
Total noninterest expense	$	170,795	$	20,987	$	15,994	$	149,808		714	%	$	4,993	31	%

2009 Compared to 2008

Noninterest expense represents our overhead expenses. As stated previously, only seven months of SFC’s expenses were included in our total 2008 operations. Similarly, none of GFH’s expenses were included in our 2008 operations. A full year of expenses for both SFC and GFH were included in our 2009 operations. The efficiency ratio, calculated by dividing noninterest expense by the sum of net interest income and noninterest income excluding securities gains was 139% in 2009 compared to 64% in 2008. The addition of SFC and GFH as well as the impairment of goodwill impacted our efficiency ratio during 2009 and would have been approximately 70% if impairment of goodwill was excluded from the calculation.

As shown in Table 4, total noninterest expense increased $149.8 million or 714% during the year ended December 31, 2009 compared to the same period of 2008. Of this increase, $84.8 million was attributed to non-cash goodwill impairment charges incurred during 2009. The impairment charges were associated with the goodwill created from the SFC and GFH acquisitions and the subsequent drop in market valuation. For additional information regarding goodwill and its impairments, refer to Note 8, Goodwill and Intangible Assets, of the Notes to the Consolidated Financial Statements. Salaries and employee benefits expense increased 267% to $42.3 million for the year ended December 31, 2009 compared to the same period in 2008 as a direct result of the mergers with SFC and GFH. We experienced a 300% increase in occupancy expense related to the increased number of properties obtained as a result of the acquisitions. Data processing expense posted an increase of $4.2 million for 2009 over the $1.2 million for 2008, resulting primarily from the cost of SFC and GFH’s outsourced data processing functions. FDIC insurance was $5.7 million for the year ended December 31, 2009 as compared with $262 thousand for the same period in 2008. This was directly a result of the increase in required insurance due to the larger amount of deposits that resulted from the acquisitions, FDIC insurance rates approximately doubling in 2009 as compared with 2008, and a special FDIC insurance assessment incurred during the second quarter that resulted in an approximate one-time cost of $1.4 million. For the year ended December 31, 2009, equipment expenses were $4.7 million compared to $663 thousand for comparative 2008. This increase was related primarily to the acquisitions of SFC and GFH.

14

2008 Compared to 2007

The efficiency ratio was 63% in 2008 compared to 58% in 2007. The acquisition of SFC and related merger integration costs impacted our efficiency ratio during 2008.

Total noninterest expense increased $5.0 million or 31% during the year ended December 31, 2008 compared to the same period of 2007, primarily resulting from the acquisition of SFC in June which contributed $5.3 million in noninterest expense during the year. Salaries and employee benefits increased $1.6 million to $11.5 million during 2008 compared with the same period in 2007, primarily related to the addition of SFC’s employee costs. The change in noninterest expense included a 36% increase in occupancy expense which resulted from the opening of our new branch location in the Edinburgh section of Chesapeake, the relocation of Shore’s Cape Charles and Salisbury, Maryland locations, and expenses related to SFC’s operations since the acquisition in June 2008. Data processing expense realized an increase of $577 thousand for the year compared to 2007, resulting from an upgrade to imaged file capture cash letter processing and the addition of SFC for seven months of 2008. There was an increase in our FDIC assessment of $220 thousand. All other noninterest expenses posted an increase of 55% to $5.8 million for the year ended December 31, 2008 compared to the same period of 2007, greatly a result of the SFC acquisition.

Provision for Income Taxes

Income tax benefit for 2009 was $32.1 million compared to an income tax expense for 2008 and 2007 of $3.7 million and $3.6 million, respectively. Our effective tax rate for the years ended December 31, 2009, 2008, and 2007 was (18.07%), 33.78%, and 34.52%, respectively. The effective tax rate related to the 2009 income tax benefit was much lower than the effective rates related to income tax expense in 2008 and 2007 largely because the $84.8 million goodwill impairment charge recorded in 2009 is not deductable for income tax purposes, thus lowering the overall tax benefit as a percentage of the pre-tax loss. Also affecting the provision for income taxes and the effective tax rate in 2009 was the establishment of a valuation reserve in the amount of $1.0 million related to $2.8 million in capital loss carryforwards. Additional information regarding the valuation allowance can be found in Note 23 - Income Taxes in the Notes to Consolidated Financial Statements. The 2008 effective tax rates are more representative of future expected tax rates.

Analysis of Financial Condition

Total assets at December 31, 2009 were $3.0 billion, a decrease of $110.2 million or 4% over December 31, 2008 total assets. This decrease was primarily associated with a $172.8 million decrease in loans, an $81.5 million increase in our allowance for loan losses, and an $85.5 million decrease in goodwill and other intangible assets (the majority of which was $84.8 million in goodwill impairment charges related to the SFC and GFH acquisitions). These decreases were partially offset by a $138.7 million increase in overnight funds sold and due from FRB.

Investment Securities

Our investment portfolio at December 31, 2009 primarily consisted of available-for-sale U.S. Agency mortgage-backed securities. The mortgage-backed securities at December 31, 2009 consisted of Government National Mortgage Association pass through securities or collateralized mortgage obligations. Our available-for-sale securities are reported at estimated fair value. They are used primarily for liquidity, pledging, earnings, and asset / liability management purposes and are reviewed quarterly for possible impairment. At year-end 2009, the estimated fair value of our available-for-sale investment securities was $161.1 million, an increase of 8% over 2008. The estimated fair value at December 31, 2008 was $149.6 million, an increase of 253% over the $42.4 million at year-end 2007. The increase between 2008 and 2009 was primarily the result of partially utilizing the increase in deposits to purchase interest-earning investment securities. Our investment portfolio was also restructured during 2009 to increase regulatory capital ratios by selling high risk-weighted securities and reinvesting the proceeds into securities that would favor our regulatory capital ratios. The average balance for 2009 was $162.3 million compared to $41.7 million at December 31, 2008. The increase in average balances was largely the result of acquiring $117.7 million of investment securities as part of the GFH acquisition.

Table 5 displays the contractual maturities and weighted average yields from investment securities at year-end 2009. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

15

Table 5: Investment Maturities and Yields

(in thousands)	Amortized Cost		Estimated Fair Value		Weighted Average Yield
U.S. agency securities:
Within 1 year	$	999	$	1,025	4.22	%
After 1 year but within 5 years		1,017		1,088	4.96	%
After 5 years but within 10 years		9,360		9,331	3.44	%
Total U.S. agency securities		11,376		11,444	3.65	%
State and municipal securities:
After 10 years		1,279		1,306	4.88	%
Total state and municipal securities		1,279		1,306	4.88	%
Mortgage-backed securities:
After 5 years but within 10 years		216		226	4.60	%
After 10 years		146,367		145,501	3.49	%
Total mortgage-backed securities		146,583		145,726	3.49	%
Equity securities		2,966		2,586	—
Total investment securities available-for-sale	$	162,204	$	161,062	3.51	%

Table 6 provides information regarding the composition of our securities portfolio showing selected maturities and yields. For more information on securities, refer to Note 3, Investment Securities, of the Notes to the Consolidated Financial Statements.

Table 6: Composition of Securities Portfolio

	December 31,
	2009						2008						2007
(in thousands)	Amortized Cost		Estimated Fair  Value		Weighted Average Yield		Amortized Cost		Estimated Fair  Value		Weighted Average Yield		Amortized Cost		Estimated Fair  Value		Weighted Average Yield
Securities available-for-sale:
U.S. agency	$	11,376	$	11,444	3.65	%	$	24,584	$	24,999	4.32	%	$	40,944	$	41,273	4.23	%
State and municipal		1,279		1,306	4.88	%		18,186		18,217	5.53	%		244		250	5.34	%
Mortgage-backed		146,583		145,726	3.49	%		95,202		95,248	5.49	%		642		641	4.74	%
Corporate		—		—	—			5,093		5,093	5.15	%		—		—	—
Equity		2,966		2,586	—			6,747		6,080	—			472		213	—
Total securities available-for-sale	$	162,204	$	161,062	3.51	%	$	149,812	$	149,637	5.04	%	$	42,302	$	42,377	4.25	%

We do not use derivatives or other off-balance sheet transactions, such as futures contracts, forward obligations, interest rate swaps, or options.

16

Overnight Funds Sold and Due From FRB

Overnight funds sold and due from FRB are temporary investments used primarily for daily cash management purposes and, as a result, daily balances vary. As of year-end 2009, overnight funds sold and due from FRB were $139.2 million compared to $510 thousand as of year-end 2008, with the increase primarily resulting from the increase in deposits during 2009. For liquidity purposes, the funds received from the increase in deposits were placed at the FRB where they were immediately accessible. Overnight funds are comprised of federal funds sold.

Loans

As a holding company of two community banks, we have a primary objective of meeting the business and consumer credit needs within our markets where standards of profitability, client relationships, and credit quality can be met. Our loan portfolio is comprised of commercial, construction, real estate-commercial mortgage, real estate-residential mortgage, and installment loans to individuals. All lending decisions are based upon evaluation of the repayment capacity, financial strength, and credit history of the borrower, the quality and value of the collateral securing each loan, and the financial strength of guarantors. With few exceptions, personal guarantees are required on loans.

As shown in Table 7, the overall loan portfolio decreased $172.8 million or 7% from year-end 2008 to year-end 2009. During 2009, management reduced the percentage of construction and development loans from 34% of the loan portfolio to 31%. Management intends to continue reducing the percentage of construction and development loans to lower its risk exposure to this type of lending and to capitalize on other lending opportunities available in our markets.

Table 7: Loans by Classification

(in thousands)	December 31,
	2009					2008					2007					2006					2005
	Balance			%		Balance			%		Balance			%		Balance			%		Balance			%
Loan Classification:
Commercial	$	361,256		15	%	$	451,426		17	%	$	109,783		23	%	$	72,133		19	%	$	60,972		21	%
Construction		757,702		31	%		897,288		34	%		165,469		35	%		116,812		31	%		85,205		30	%
Real estate - commercial mortgage		740,570		30	%		673,351		26	%		151,601		32	%		140,260		37	%		104,313		37	%
Real estate - residential mortgage		524,853		22	%		528,760		21	%		38,523		8	%		25,523		7	%		20,011		7	%
Installment loans to individuals		42,858		2	%		50,085		2	%		11,976		2	%		20,599		6	%		15,107		5	%
Deferred loan fees and related costs		(547	)	—			(1,384	)	—			(203	)	—			(283	)	—			(278	)	—
Total loans	$	2,426,692		100	%	$	2,599,526		100	%	$	477,149		100	%	$	375,044		100	%	$	285,330		100	%

Commercial loans consist of loans to businesses which typically are not collateralized by real estate. Generally, the purpose of commercial loans is for the financing of accounts receivable, inventory, or equipment and machinery. Our commercial loan portfolio decreased $90.2 million from the 2008 year-end balance of $451.4 million to the 2009 year-end balance of $361.3 million. The commercial loan category grew 311% from year-end 2007 to year-end 2008 due primarily to the acquisitions of SFC and GFH.

Construction loans decreased $139.6 million from the year-end 2008 balance of $897.3 million to the year-end 2009 balance of $757.7 million, thus lowering the concentration of construction loans to 31% of the total loan portfolio at December 31, 2009 compared with 34% at December 31, 2008. Our specialization in construction lending has resulted in a loan concentration, defined as 10% of the total loan portfolio, in loans to real estate developers. These loans are usually collateralized by the underlying real estate. Our construction loans at December 31, 2009 included $164.4 million of interest reserve loans. The interest on these loans is paid out of an interest reserve, where interest costs are funded out of the proceeds of the construction loan. Construction and development loans are made to individuals and businesses for the purpose of construction of single family residential properties, multi-family properties, and commercial projects, as well as the development of residential neighborhoods and commercial office parks. The construction loan category grew 442% from year-end 2007 to year-end 2008 due to the acquisitions of SFC and GFH.

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We make real estate-commercial mortgage loans for the purchase and refinancing of owner occupied commercial properties as well as non-owner occupied income producing properties. These loans are secured by various types of commercial real estate including office, retail, warehouse, industrial, storage facilities, and other non-residential types of properties. Our real estate-commercial mortgage loan portfolio increased $67.2 million from the 2008 year-end balance of $673.4 million to the 2009 year-end balance of $740.6 million. Our real estate - commercial mortgage loan category increased 344% from year-end 2007 to year-end 2008 largely due to the acquisitions of SFC and GFH.

The real estate-residential mortgage portfolio includes first and second mortgage loans, home equity lines of credit, and other term loans secured by first and second mortgages. First mortgage loans are generally for the purchase of primary residences, second homes, or residential investment property. Second mortgages and home equity loans are generally for personal, family, and household purposes such as home improvements, major purchases, education, and other personal needs. The real estate - residential mortgage loan portfolio increased $3.9 million from the 2008 year-end balance of $528.8 million to the 2009 year-end balance of $524.9 million. The real estate - residential mortgage loan category increased 1273% from year-end 2007 to year-end 2008. The acquisitions of SFC and GFH accounted for the majority of the increase in real estate-residential mortgages.

Installment loans to individuals are made primarily for personal, family, and general household purposes. More specifically, we make automobile loans, home improvement loans, loans for vacations, and debt consolidation loans. The installment loan portfolio decreased $7.2 million from the 2008 year-end balance of $50.1 million to the 2009 year-end balance of $42.9 million. The installment loan category increased 318% from year-end 2007 to year-end 2008.

Our long-range objective continues to be profitable growth in the loan portfolio, while our short-term focus will be on absorbing the acquired companies’ loan portfolios and managing the entire loan portfolio through the current challenging economic conditions. Additionally, our prudent business practices and internal guidelines and underwriting standards will continue to be followed in making lending decisions in order to manage exposure to loan losses.

Table 8 indicates our loans by geographic area as of December 31, 2009.

Table 8: Loans by Geographic Location

(in thousands)	Commercial		Construction		R/E Commercial		R/E Residential		Installment		Total
Hampton Roads	$	251,576	$	262,637	$	319,183	$	124,677	$	28,193	$	986,266
Triangle		33,172		120,781		114,212		100,977		896		370,038
Richmond		19,379		102,374		87,726		35,213		190		244,882
Outer Banks		15,781		72,695		86,243		64,063		3,172		241,954
Eastern Shore		11,116		37,852		40,384		131,328		4,867		225,547
Northeast NC		24,529		61,614		48,768		55,035		5,264		195,210
Wilmington		5,703		99,749		44,054		13,560		276		163,342
Total loans	$	361,256	$	757,702	$	740,570	$	524,853	$	42,858	$	2,427,239

Note: This table does not include deferred loan fees.

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Table 9 sets forth the maturity periods of our loan portfolio as of December 31, 2009. Demand loans are reported as due within one year. Variable rate loans with interest rate floors are considered fixed rate loans for the purpose of this report once the floors have been reached. Since the majority of our loan portfolio is short-term, we can re-price our portfolio frequently to adjust the portfolio to current market rates.

Table 9: Loan Maturities Schedule

(in thousands)	Commercial		Construction		R/E Commercial		R/E Residential		Installment		Total
Variable Rate:
Within 1 year	$	42,139	$	216,294	$	105,092	$	143,242	$	10,519	$	517,286
1 to 5 years		5,351		7,660		41,878		61,554		200		116,643
After 5 years		1,274		11,789		16,216		92,820		235		122,334
Total variable rate		48,764		235,743		163,186		297,616		10,954		756,263
Fixed Rate:
Within 1 year		141,832		419,408		194,579		70,230		3,646		829,695
1 to 5 years		159,920		91,528		348,929		108,280		27,823		736,480
5 years		10,740		11,023		33,876		48,727		435		104,801
Total fixed rate		312,492		521,959		577,384		227,237		31,904		1,670,976
Total maturities	$	361,256	$	757,702	$	740,570	$	524,853	$	42,858	$	2,427,239

Note: This table does not include deferred loan fees.

Allowance for Loan Losses and Provision for Loan Losses

The purpose of the allowance for loan losses is to provide for potential losses inherent in our loan portfolio. Management regularly reviews the loan portfolio to determine whether adjustments are necessary to maintain an allowance for loan losses sufficient to absorb losses. Our review takes into consideration changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and review of current economic conditions that may affect the borrower’s ability to repay. Some of the tools used in the credit review process to identify potential problem loans include past due reports, collateral valuations, cash flow analyses of borrowers, and risk ratings of loans. In addition to the review of credit quality through ongoing credit review processes, we construct a comprehensive allowance analysis for our loan portfolio at least quarterly. This analysis includes specific allowances for individual loans, general allowances for loan pools which factor in our historical loan loss experience, loan portfolio growth and trends, and economic conditions, and unallocated allowances predicated upon both internal and external factors.

We began the year 2009 using the methodology for loan loss allowance calculation previously employed by HRB. It was in the second quarter of 2009 when significant deterioration in credit quality became evident, through increased delinquencies, nonaccrual loans, and charge-offs. That deteriorating trend continued in the third and fourth quarters of 2009. We employed both internal resources as well as the resources of an independent third party credit consultant in order to arrive at a process we believe would work well on an on-going basis for the combined institution.

In the process of consolidating the internal credit review process for the acquired companies, a variety of initiatives were undertaken to bolster the loan grading function and the determination of the allowance for loan losses. Initiatives and procedures which augmented the loan function included acquisition and development loan reviews, interest reserve loan reviews, past due loan reviews, forecasting reviews, standard loan reviews, loans presented for approval and renewal, relationship reviews, and cash flow analyses. We also conformed and refined risk grades. In addition to the internal review of credit quality, the independent credit consulting firm assisted us with the establishment of fair values for the GFH loan portfolio. Based upon evidence of rapid deterioration in credit quality affecting a significant volume of loans and continued weakening of economic conditions, we made additional modifications to our model of recalculating the loan loss allowance. We conformed the application of risk grades in the allowance calculation, changed the time for impairment factor from a variable period to one year, and made upward adjustments to the factors applied to loans with real estate collateral in those markets that were experiencing

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the most significant rates of decline. We subsequently modified our historical loss factor from a three year annual average to a weighted three year quarterly average to place greater emphasis on current conditions. On a net basis, these changes resulted in a higher volume of impaired loans, and consequently, an increase to our allowance for loan losses. In our opinion, changes made to the credit measurement standards made adjustments necessary to accurately reflect the risk of loss inherent in the loan portfolio as a result of the serious economic downturn and rapid deterioration in the credit quality. As a result of the magnitude and the rate of change in the credit quality of the loan portfolio, we are unable to quantify with reasonable certainty the amount of the loans that would have become impaired under the original criteria from those that were impaired solely due to the change in criteria. Upon review of the impact of the changes made to the allowance methodology compared with the deterioration in credit quality, we are confident that the credit quality issue was the dominant factor that led to an increase in impaired loans and in the resultant increase in the loan loss allowance. Additional information about the allowance for loan losses can be found in Note 1, Basis of Financial Statement Presentation and Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements.

As part of the loan loss reserve methodology, loans are categorized into one of five categories: commercial, construction, commercial real estate, residential real estate, and consumer installment. These categories are further subdivided by assigned asset quality. Loss factors are calculated using qualitative data and then are applied to each of the loan pools to determine a reserve level for each of the five pools of loans. In addition, special allocations may be assigned to nonaccrual or other problem credits.

Primarily as a result of the increase in impaired loans, the allowance for loan losses increased significantly during 2009, both in dollars and as a percentage of total loans. Since risks to the loan portfolio include general economic trends as well as conditions affecting individual borrowers, the allowance is an estimate. As shown in Table 10, the allowance for loan losses was $132.7 million or 5.47% of outstanding loans as of December 31, 2009 compared with $51.2 million or 1.97% of outstanding loans as of December 31, 2008. We increased the allowance for loan losses $81.5 million (net of charge-offs and recoveries) during 2009 as a result of our recognition of deterioration in loan credit quality, continued softening in the economy, decreases in real estate values, increases in charge-offs and non-performing assets, and the results of the independent review of the portfolio. Net charge-offs were $52.7 million for the year ended December 31, 2009 compared with the $235 thousand on December 31, 2008. Our provision for loan losses in 2009 was $134.2 million compared to $1.4 million in 2008 and $1.2 million in 2007. The increased provision for loan losses during 2009 was attributable to the current economic environment. Management will continue to adjust the allowance for loan losses in 2010 as the portfolio performance dictates. In addition, any new initiatives the U.S. government implements that may offer relief to our borrowers will be reviewed.

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Table 10: Allowance for Loan Losses Analysis

(in thousands)	2009			2008			2007			2006			2005
Allowance for Loan Losses:
Balance at beginning of year	$	51,218		$	5,043		$	3,911		$	3,597		$	3,071
Acquired through SFC acquisition		—			2,932			—			—			—
Acquired through GFH acquisition		—			42,060			—			—			—
Charge-offs:
Commercial		(11,975	)		(37	)		—			—			(24	)
Construction		(22,900	)		—			(91	)		—			—
Real estate - commercial mortgage		(10,882	)		—			—			—			—
Real estate - residential mortgage		(6,587	)		(157	)		—			—			—
Installment loans to individuals		(1,192	)		(143	)		(18	)		(59	)		(75	)
Total charge-offs		(53,536	)		(337	)		(109	)		(59	)		(99	)
Recoveries:
Commercial		291			—			—			166			119
Construction		29			4			—			—			—
Real estate - commercial mortgage		108			—			—			—			—
Real estate - residential mortgage		169			—			—			—			—
Installment loans to individuals		195			98			9			27			20
Total recoveries		792			102			9			193			139
Net (charge-offs) recoveries		(52,744	)		(235	)		(100	)		134			40
Provision for loan losses		134,223			1,418			1,232			180			486
Balance at end of year	$	132,697		$	51,218		$	5,043		$	3,911		$	3,597
Allowance for loan losses to year-end loans		5.47	%		1.97	%		1.06	%		1.04	%		1.26	%
Ratio of net (charge-offs) recoveries to average loans		(2.06	)%		(0.04	)%		(0.02	)%		0.04	%		0.01	%

The allowance consists of specific, general, and unallocated components. Table 11 provides a breakdown of the allowance for loan losses and other related information at December 31, 2009 and 2008.

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Table 11: Allowance for Loan Losses Components and Related Data

	December 31,
(dollars in thousands)	2009			2008
Allowance for loan losses:
Pooled component	$	34,050		$	47,832
Specific component		91,488			545
Unallocated component		7,159			2,841
Total	$	132,697		$	51,218
Impaired loans	$	469,068		$	4,291
Non-impaired loans		1,957,624			2,595,235
Total loans	$	2,426,692		$	2,599,526
Pooled component as % of non-impaired loans		1.74	%		1.84	%
Specific component as % of impaired loans		19.50	%		12.70	%
Allowance as of % of loans		5.47	%		1.97	%
Allowance as of % of nonaccrual loans		53.44	%		155.75	%

The ASC 450 (pooled) component of the allowance declined beginning in the second quarter of 2009. General allocations decreased by $13.7 million to $34.1 million at December 31, 2009 from $47.8 million at December 31, 2008. The general component of the allowance is based on several factors, including historical loan loss experience as well as economic and other qualitative considerations. This decrease is related to several factors. Loan demand weakened during 2009, as evidenced by the decline in total loans. Additionally, as loans migrated into impaired loan status, the amount of loans accounted for under ASC 450 declined. Furthermore, as we continued to analyze the GFH portfolio and experience migration of loans from ASC 450 to ASC 310-40, management no longer considered necessary the additional qualitative factor it established as of December 31, 2008. The general component increased in the fourth quarter of 2009, due largely to higher levels of charge-offs experienced in the second half of the year.

The ASC 310-40 (specific) component of our allowance for loan losses increased significantly beginning with the second quarter of 2009. During 2009, loan credit quality declined as evidenced by the significant increases in nonaccrual and impaired loans. Additionally, during the second quarter, as nonperforming assets became more significant, we reviewed our methodology of calculating estimated losses on impaired loans, which resulted in a much more conservative calculation and, therefore, a much higher, specific component for the allowance calculation. Specific loan loss allocations increased $90.9 million to $91.5 million at December 31, 2009 from $545 thousand at December 31, 2008. The increase was attributable to a significant increase in impaired loan from $4.3 million as of December 31, 2008 to $469.1 million as of December 31, 2009. Of these loans, $248.3 million were on nonaccrual status at December 31, 2009.

The specific allowance for loan losses necessary for these loans is based on a loan-by-loan analysis and varies between impaired loans largely due to the level of collateral. As a result, the ratio of allowance for loan losses to nonaccrual loans is not sufficient for measuring the adequacy of the allowance for loan losses. Table 12 provides additional ratios that measure our allowance for loan losses.

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Table 12: Adequacy of Loan Loss Allowance

	December 31, 2009
Non-performing loans for which full loss has been charged off to total loans	0.91	%
Non-performing loans for which full loss has been charged off to non-performing loans	8.91	%
Charge off rate for nonperforming loans which the full loss has been charged off	42.46	%
Coverage ratio net of nonperforming loans for which the full loss has been charged off	58.67	%
Total allowance divided by total loans less nonperforming loans for which the full loss has been charged off	5.52	%
Allowance for individually impaired loans divided by total loans that are individually impaired	19.50	%

The unallocated portion of the loan loss allowance increased $4.3 million to $7.1 million at December 31, 2009 from $2.8 million at December 31, 2008. Given the inherent risk embedded within this profile, the Company believes that the increased unallocated reserve is warranted to offset any potential credit risk that has yet to be identified.

We allocated the allowance for loan losses to the categories as shown in Table 13. Notwithstanding these allocations, the entire allowance for loan losses is available to absorb charge-offs in any loan category.

Table 13: Allocation of Allowance for Loan Losses

(in thousands)	2009		2008		2007		2006		2005
Commercial	$	23,819	$	10,374	$	1,447	$	1,058	$	1,068
Construction		57,958		18,529		1,522		993		767
Real estate - commercial mortgage		29,700		10,959		1,395		1,192		978
Real estate - residential mortgage		12,589		8,009		264		160		130
Installment loans to individuals		1,473		506		166		290		307
Unallocated		7,159		2,841		249		218		347
Total allowance for loan losses	$	132,697	$	51,218	$	5,043	$	3,911	$	3,597

If a loan is considered impaired, it is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or at the loan’s observable market price or the net realizable fair value of the collateral if the loan is collateral dependent. When a loan is determined to be a collateral dependent impaired loan, the Company may order an updated appraisal unless a current appraisal is already on hand. The appraised value, adjusted for estimated selling costs, is used to determine net realizable value. As of December 31, 2009, the Company also maintained a valuation matrix which was used to discount appraised values greater than three months old. This matrix was also used in cases where there was a delay in obtaining an updated appraisal. Occasionally, valuations are appropriately adjusted based on facts known to the Company, such as list prices or property condition. For example, an appraisal may assume the collateral is in good condition, but the Company’s credit administration area subsequently learns that repairs are necessary to bring the property into saleable condition. Another example would be when the Company maintains an appraisal of a lot in a subdivision, and credit administration learns of a subsequent sale of similarly situated lots in the same area at lower prices. In both cases, downward adjustments in

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value are appropriately made to reflect our understanding of current conditions. When appraisals were not required at inception, various valuation methods include, but are not limited to, current tax assessments by the city or county, discounted purchase price, or current listing price as verified by a reputable market agent.

Prior to any foreclosure proceedings relative to real estate secured credits, a current appraised value is obtained. Total impaired loans were $469.1 million at December 31, 2009, an increase of $464.8 million over December 31, 2008. Of these loans, $248.3 million were in nonaccrual status at December 31, 2009. During 2009, the allowance as a percentage of non-accrual loans declined to 53.44% at December 31, 2009 from 155.75% at December 31, 2008.

At year-end 2009, management believed the allowance for loan losses is commensurate with the risk existing in our loan portfolio and is directionally consistent with the change in the quality of our loan portfolio. However, the allowance is subject to regulatory examinations and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance in comparison to peer banks identified by regulatory agencies. Such agencies may require us to recognize additions to the allowance for loan losses based on their judgments about information available at the time of the examinations.

Non-Performing Assets

Total non-performing assets were $257.2 million or 9% of total assets at year-end 2009 as compared to $41.2 million or 1% of total assets at year-end 2008. Management classifies non-performing assets as those loans in nonaccrual status; those loans on which payments have been delinquent 90 days or more, but are still accruing interest; and foreclosed real estate and repossessed assets. At December 31, 2009 we had no loans categorized as 90 days or more past due and still accruing interest, and on December 31, 2008, we had $3.2 million. We had $8.9 million and $5.1 million of foreclosed real estate and repossessed assets at December 31, 2009 and 2008, respectively. Management closely reviews the composition of non-performing assets and related collateral values.

As shown in Table 14, nonaccrual loans were $248.3 million at December 31, 2009 compared to $32.9 million at December 31, 2008. As a general rule, loans are placed in nonaccrual status when principal or interest is 90 days or more past due. If income on nonaccrual loans had been recorded under original terms, $44.2 million and $99 thousand of additional interest income would have been recorded in 2009 and 2008, respectively.

Table 14: Nonaccrual Loans

	December 31,
(in thousands)	2009		2008
Commercial	$	24,803	$	2,465
Construction		150,325		19,103
Real estate-commercial mortgage		50,858		6,298
Real estate-residential mortgage		22,146		5,008
Installment loans (to individuals)		171		11
Total nonaccrual loans	$	248,303	$	32,885

Loans Acquired with Deteriorated Credit Quality

Loans acquired with evidence of credit quality deterioration since origination and for which it is probable at purchase that we will be unable to collect all contractually required payments are accounted for under ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality. Evidence of credit quality deterioration as of the purchase date may include statistics such as past due status and refreshed borrower credit scores, some of which were not immediately available as of the purchase date. ASC 310-30 addresses accounting for differences between contractual and expected cash flows to be collected from our initial investment in loans if those differences are attributable, at least in part, to credit quality. ASC 310-30 requires that acquired impaired loans be recorded at fair value and prohibits “carrying over” or the creation of valuation allowances in the initial accounting for loans acquired that are within the scope of ASC 310-30.

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In accordance with ASC 310-30, certain acquired loans of GFH that were considered impaired were written down to fair value at the acquisition date. As a result, there were no reported net charge-offs in 2008 on these loans as the initial fair value at acquisition date would have already considered the estimated credit losses on these loans. As of December 31, 2009, the carrying value was $78.2 million and the unpaid balance on these loans was $88.0 million. ASC 310-30 does not apply to loans GFH previously securitized as they are not held on our balance sheet. Given that the problem loans of the GFH portfolio were recorded at estimated fair value, and the GFH loans comprised a majority of the Company’s loan portfolio, impaired loans were minimal as of December 31, 2008. As a result, the ASC 310-30 portion of the allowance for loan losses at December 31, 2008 was also minimal. During 2009, the ASC 310-30 portfolio experienced further credit deterioration due to weakness in the housing markets and the impacts of a slowing economy. For further information regarding loans accounted for in accordance with ASC 310-30, see Note 5, Accounting for Certain Loans Acquired in a Transfer, of the Notes to the Consolidated Financial Statements.

Deposits

Deposits are the primary source of our funds for use in lending and general business purposes. Our balance sheet growth is largely determined by the availability of deposits in our markets and the prospects of profitably utilizing the available deposits by increasing the loan or investment portfolios. Total deposits at December 31, 2009 were $2.5 billion, an increase of $198.9 million or 9% over December 31, 2008. Total brokered deposits were $386.4 million or 15% of deposits at December 31, 2009, which was a decrease of $98.4 million from total brokered deposits of $484.8 million at December 31, 2008. In 2009, average deposits increased $1.8 billion or 314% primarily resulting from the acquisition of GFH.

As shown in Table 15, we have experienced a shift in the composition of deposits in recent years resulting from the strong competition for deposit accounts within the local market. At December 31, 2009, noninterest bearing demand deposits were $248.7 million, an increase of $7.9 million over the $240.8 million at December 31, 2008.

Table 15: Deposits by Classification

	December 31,
	2009				2008				2007
(dollars in thousands)	Balance		%		Balance		%		Balance		%
Deposit Classifications:
Noninterest bearing demand	$	248,682	10	%	$	240,813	11	%	$	100,553	23	%
Interest bearing demand		916,865	37	%		684,009	30	%		40,299	9	%
Savings		82,860	3	%		118,001	5	%		82,093	19	%
Time deposits less than $100		889,788	36	%		858,787	37	%		114,833	27	%
Time deposits $100 or more		356,845	14	%		394,536	17	%		93,679	22	%
Total deposits	$	2,495,040	100	%	$	2,296,146	100	%	$	431,457	100	%

Interest bearing demand deposits at year-end 2009 were $916.9 million, an increase of $232.9 million over comparative 2008. Interest bearing demand deposits included $47.6 million of brokered money market funds at December 31, 2009, which was $197.7 million lower than the balance of brokered money market funds of $245.3 million outstanding at December 31, 2008. Therefore, core bank interest bearing demand deposits increased by $430.6 million over the last year. This increase was primarily attributed to a promotional interest-bearing money market account instituted during 2009.

At year-end 2009 savings accounts were $82.9 million, a decrease of $35.1 million over 2008. The decrease was due to internal transfers of accounts to the new promotional interest-bearing money market account.

Time deposits with balances less than $100 thousand increased $31.0 million or 4% during 2009 over 2008 while time deposits with balances of $100 thousand or more decreased $37.7 million or 10% during 2009 over 2008. Brokered CDs represented $338.8 million or 14% of the December 31, 2009 total deposits, which was an increase of $99.3 million over the $239.5 million of brokered CDs outstanding at December 31, 2008. Therefore, customer CDs decreased $185.2 million over the last year, which was also due to internal transfers of accounts to the new high interest-bearing money market account.

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We will continue to focus on core deposit growth as our primary source of funding. Core deposits typically are non-brokered and consist of noninterest bearing demand accounts, interest bearing checking accounts, money market accounts, savings accounts, and time deposits of less than $100 thousand. Core deposits totaled $1.8 billion or 70% of total deposits at year-end 2009 and $1.5 billion or 65% of total deposits at year-end 2008.

Borrowings

Additional sources of funds are short-term and long-term borrowings from various sources including the FRB discount window, FHLB, purchased funds from correspondent banks, reverse repurchase accounts, and trust preferred securities. At December 31, 2009 and 2008, we had loans from the FHLB totaling $228.2 million and $279.1 million, respectively. As shown in Table 16, maturities of FHLB borrowings at December 31, 2009 were as follows:

Table 16: FHLB Borrowings

	Balance (in  thousands)
2010	$	11,685
2011		15,000
2012		196,247
2013		—
2014		5,283
	$	228,215

FHLB borrowings carry a weighted average interest rate of 4.06% as of December 31, 2009 (excluding the impact of purchase accounting adjustments) and are all convertible at FHLB’s option on the interest payment dates to either one or three month LIBOR except for five fixed rate advances that total $32.5 million. The FHLB borrowings were collateralized with residential real estate loans, commercial real estate loans, and investment securities.

We acquired two reverse repurchase agreements in the GFH merger. Each repurchase agreement has an original principal balance of $10.0 million and is collateralized with mortgage-backed securities with a similar fair market value. The first repurchase agreement has a five-year term with an interest rate fixed at 4.99% until it is repurchased by the counterparty on August 1, 2011. The second repurchase agreement has a seven-year term with a repurchase date of August 1, 2013 (the “2013 Agreement”). The interest rate of this agreement is a variable rate of 9.85% minus three-month LIBOR (0.25% at December 31, 2009), not to exceed 5.85%. The applicable interest rate in effect at December 31, 2009 was 5.85%. Both agreements are callable by the counterparty on a quarterly basis and the 2013 Agreement became immediately callable as a result of BOHR not maintaining well-capitalized status with the FDIC. The estimated carrying value of these agreements as of December 31, 2009 was $21.0 million.

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As part of the GFH acquisition, we acquired four placements of trust preferred securities, as shown in Table 17.

Table 17: Trust Preferred Securities

	Amount (in thousands)		Interest Rate		Redeemable On Or After	Mandatory Redemption
Gateway Capital Statutory Trust I	$	8,000	LIBOR + 3.10	%	September 17, 2008	September 17, 2033
Gateway Capital Statutory Trust II		7,000	LIBOR + 2.65	%	July 17, 2009	June 17, 2034
Gateway Capital Statutory Trust III		15,000	LIBOR + 1.50	%	May 30, 2011	May 30, 2036
Gateway Capital Statutory Trust IV		25,000	LIBOR + 1.55	%	July 30, 2012	July 30, 2037

LIBOR in the table above refers to 3-month LIBOR. In all four trusts, the trust issuer has invested the total proceeds from the sale of the trust preferred securities in junior subordinated deferrable interest debentures issued by the Company. The trust preferred securities pay cumulative cash distributions quarterly at an annual rate, reset quarterly. The dividends paid to holders of the trust preferred securities, which are recorded as interest expense, are deductible for income tax purposes. We have fully and unconditionally guaranteed the trust preferred securities through the combined operation of the debentures and other related documents. Our obligation under the guarantee is unsecured and subordinate to our senior and subordinated indebtedness. The carrying value of these debentures as of December 31, 2009 was $28.3 million. We have suspended the payment of dividends on all four issues of trust preferred securities, however, at year-end 2009 all payments had been made in accordance with contractual terms.

We borrowed $28.0 million from another bank in 2008. This borrowing had a variable interest rate of prime minus 1% with a floor of 4% (4% at December 31, 2008) and was paid in full during 2009.

Capital Resources and Liquidity

Capital Resources. Total shareholders’ equity decreased $163.8 million or 48% to $181.0 million at December 31, 2009. This decrease in shareholders’ equity was primarily a result of the $145.5 million net loss for the period ended December 31, 2009 and common and preferred dividends (including amortization of preferred stock discount) of approximately $13.5 million.

On December 31, 2008, as part of the Capital Purchase Program established by the Treasury under the Emergency Economic Stabilization Act of 2008 (“EESA”), we entered into a Letter Agreement and Securities Purchase Agreement—Standard Terms (collectively, the “Purchase Agreement”) with the Treasury, pursuant to which we sold (i) 80,347 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series C, no par value per share, having a liquidation preference of $1,000 per share (the “Series C Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 1,325,858 shares of our Common Stock, $0.625 par value per share (the “Common Stock”), at an initial exercise price of $9.09 per share, subject to certain anti-dilution and other adjustments, for an aggregate purchase price of approximately $80.3 million in cash.

The Warrant is immediately exercisable at a price of $9.09 per share. The Warrant provides for the adjustment of the exercise price and the number of shares of common stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distribution of securities or other assets to holders of common stock, and upon certain issuances of common stock at or below a specified price relative to the then-current market price of common stock. The Warrant expires ten years from the issuance date. Pursuant to the Purchase Agreement, the Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant.

The Series C Preferred Stock qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per annum for the first five years, and thereafter, at a rate of 9% per annum. The Series C Preferred Stock is generally non-voting. Prior to December 31, 2011, unless we redeemed the Series C Preferred Stock or the Treasury has transferred the Series C Preferred Stock to a third party, the consent of the Treasury will be required for us to increase our common stock dividend or repurchase the common stock or other equity or capital securities, other than certain circumstances specified in the Purchase Agreement.

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Upon the request of the Treasury at any time, we have agreed to promptly enter into a deposit arrangement to which the Series C Preferred Stock may be deposited and depositary shares (“Depositary Shares”), representing fractional shares of Series C Preferred Stock, may be issued. We have registered the Series C Preferred Stock, the Warrant, the shares of common stock underlying the Warrant and Depositary Shares.

During 2009, we repurchased 69,820 shares of our common stock in the open market and privately negotiated transactions at prices ranging from $1.75 to $8.95. During 2008, we repurchased 131,406 shares of our common stock in the open market and privately negotiated transactions at prices ranging from $9.51 to $13.13.

In the third quarter of 2009, we registered 32.5 million shares of common stock and attempted to raise additional capital from the sale of these securities. We did not raise the desired capital.

During 2009, we paid two quarterly cash dividends of $0.11 per share on our common stock to shareholders of record as of February 27, 2009 and May 15, 2009. To preserve capital, on July 30, 2009 the Board of Directors voted to suspend the quarterly dividends on our common stock. Our ability to distribute cash dividends in the future may be limited by financial performance, regulatory restrictions, and the need to maintain sufficient consolidated capital.

We took additional actions during the fourth quarter that were intended to preserve capital. On October 30, 2009, we announced suspension of dividend payments on our Series A and B Preferred Stock. On November 17, 2009, we notified the U.S. Department of the Treasury (“Treasury”) of our intent to defer the payment of our quarterly cash dividend on our Fixed Rate Cumulative Perpetual Preferred Stock Series C issued to the Treasury in connection with our participation in the TARP CPP. On December 10, 2009, at a special meeting of the shareholders, the number of authorized common shares was increased to 100 million from 70 million.

We are subject to regulatory risk-based capital guidelines that measure capital relative to risk-weighted assets and off-balance sheet financial instruments. Tier I capital is comprised of shareholders’ equity, net of unrealized gains or losses on available-for-sale securities, less intangible assets, while total risk-based capital adds certain debt instruments and qualifying allowances for loan losses. As of December 31, 2009, our consolidated regulatory capital ratios are Tier 1 Leverage Ratio of 5.19%, Tier 1 Risk-Based Capital Ratio of 6.80%, and Total Risk-Based Capital of 8.10%.

Because our total risk-based capital ratio was below 10% as of December 31, 2009, we are considered to be only “adequately capitalized” under the regulatory framework for prompt corrective action. BOHR is also considered to be “adequately capitalized” under applicable regulations and Shore is considered to be “well capitalized.” Although there can be no assurance that we will be successful, the Board and management will make their utmost efforts to raise sufficient capital to regain “well-capitalized” status at all levels, and we are continuing to explore options for raising additional capital.

Liquidity. Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. At December 31, 2009, cash and due from banks, overnight funds sold and due from FRB, interest-bearing deposits in other banks, and investment securities were $361.1 million or 12% of total assets.

At December 31, 2009, our Banks had credit lines in the amount of $286.0 million at the FHLB. These lines may be utilized for short- and/or long-term borrowing. At December 31, 2009, the Banks had not utilized these credit lines for short-term borrowing purposes, while we had $34.3 million of short-term FHLB borrowings outstanding at December 31, 2008.

We also possess additional sources of liquidity through a variety of borrowing arrangements. The Banks maintain federal funds lines with large regional and national banking institutions and through the FRB Discount Window. These available lines totaled approximately $165.0 million at December 31, 2009. These short-term lines were not utilized for short-term borrowing purposes at December 31, 2009. The Banks had $73.3 million in short-term loans outstanding under these borrowing arrangements at December 31, 2008.

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Total brokered deposits were $386.4 million or 15% of deposits at December 31, 2009. Under the regulatory framework for prompt corrective action, we are unlikely to retain these brokered deposits at BOHR due to the “adequately capitalized” status as of December 31, 2009. Section 29 of the Federal Deposit Insurance Act limits the use of brokered deposits by institutions that are less than “well-capitalized” and allows the FDIC to place restrictions on interest rates that institutions may pay.

Under normal conditions, our liquid assets and the ability to generate liquidity through normal operations and various liability funding mechanisms should be sufficient to satisfy our depositors’ requirements, meet our customers’ credit needs, and supply adequate funding for our other business needs. As demonstrated by some of the nation’s largest financial institutions, liquidity may be adversely affected if the sources of liquidity suddenly become unavailable. Such a situation may occur when the financial condition of an institution deteriorates as the result of operating losses and rising levels of credit problems. In such circumstances, credit availability and other funding sources may diminish significantly. We sustained a significant operating loss in 2009 and we may experience another operating loss in 2010. Our problem assets are at high levels and may rise further. We face the possibility of entering into an agreement with regulatory authorities that may affect our business operations. We unsuccessfully tried to raise capital in 2009. Although we are continuing to attempt to raise capital, there is no assurance that we will be successful. We have concerns about our liquidity position and plan to monitor it carefully and to take actions available to us to protect our position.

On May 29, 2009, the FDIC approved a final rule to implement new interest rate restrictions on institutions that are not “well-capitalized.” The rule, which became effective on January 1, 2010, limits the interest rate paid by such institutions to 75 basis points above a national rate, as derived from the interest rate average of all institutions. On December 4, 2009, the FDIC issued a Financial Institution Letter, FIL-69-2009, which requires institutions that are not well-capitalized to request a determination from the FDIC whether they are operating in an area where rates paid on deposits are higher than the national rate. The Financial Institution Letter allows the institutions that submit determination requests by December 31, 2009 to follow the national rate for local customers by March 1, 2010, if determined not to be operating in a high rate area. Regardless of the determination, institutions must use the national rate caps to determine conformance for all deposits outside the market area beginning January 1, 2010. The interest rate restrictions described above apply to BOHR due to its regulatory capital status as of December 31, 2009.

In anticipation of some of these restrictions that are now limiting our borrowing capacity, we implemented a risk-weighted capital and liquidity plan in the third quarter to improve our regulatory capital ratios and increase our liquid cash assets. At December 31, 2009, we had approximately $200 million in cash and due from banks including the FRB. The plan was comprised largely of a core deposit growth campaign, highlighted by a promotional money market account with highly competitive rates of interest that are generally committed through June 30, 2010. The plan included a restructuring of the investment securities portfolio, whereby the portfolio is now comprised primarily of investment securities which are zero percent risk-weighted under regulatory capital guidelines. The plan also included sales of certain equity securities, including preferred stock holdings of the Federal National Mortgage Corporation and Government National Mortgage Corporation, which were previously owned by GFH.

Maturities of brokered certificates of deposit (in thousands), as of December 31, 2009, are shown in Table 18. Due to its regulatory capital status, BOHR is currently prohibited from originating or renewing brokered funds without the appropriate waivers.

Table 18: Maturities of Brokered Certificates of Deposit

Maturity Date	Total		Bank of Hampton Roads		Shore Bank
January - March 2010	$	160,207	$	159,606	$	601
April - June 2010		83,149		83,149
July - September 2010		38,107		38,107
October - December 2010		30,252		30,252
2011		27,131		26,222		909
	$	338,846	$	337,336	$	1,510

Given the restrictions placed upon BOHR, we plan to monitor our liquidity position regularly and carefully and to take actions available to us to protect our position.

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Contractual Obligations

We have contractual obligations to make future payments on debt and lease agreements. Additionally, in the normal course of business, we enter into contractual arrangements whereby we commit to future purchases of products or services from unaffiliated parties. Our contractual obligations consist of time deposits, borrowings, and operating lease obligations. Table 19 shows payment detail (in thousands) for these contractual obligations as of December 31, 2009.

Table 19: Contractual Obligations

	Less than 1 Year		1 - 3 Years		3 - 5 Years		Over 5 Years		Total
Time deposits	$	932,118	$	283,649	$	29,171	$	1,695	$	1,246,633
FHLB borrowings		11,685		211,247		5,283		—		228,215
Other borrowings		—		10,624		10,382		28,248		49,254
Operating lease obligations		2,963		5,079		4,638		18,979		31,659
Total contractual obligations	$	946,766	$	510,599	$	49,474	$	48,922	$	1,555,761

Off-Balance Sheet Arrangements

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. For more information on our off-balance sheet arrangements, see Note 13, Financial Instruments with Off-Balance-Sheet Risk, of the Notes to the Consolidated Financial Statements.

Legal Contingencies

Various legal actions arise from time to time in the normal course of our business. There were no significant asserted claims or assessments as of December 31, 2009. Management was not aware of any unasserted claims or assessments that may be probable of assertion at December 31, 2009.

Interest Rate Sensitivity

Our primary market risk is exposure to interest rate volatility. Fluctuations in interest rates will impact both the level of interest income and interest expense and the market value of our interest earning assets and interest bearing liabilities.

The primary goal of our asset/liability management strategy is to optimize net interest income while limiting exposure to fluctuations caused by changes in the interest rate environment. Our ability to manage our interest rate risk depends generally on our ability to match the maturities and re-pricing characteristics of our assets and liabilities while taking into account the separate goals of maintaining asset quality and liquidity and achieving the desired level of net interest income.

Our management, guided by the Asset/Liability Committee (“ALCO”), determines the overall magnitude of interest sensitivity risk and then formulates policies governing asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These decisions are based on management’s expectations regarding future interest rate movements, the state of the national and regional economy, and other financial and business risk factors.

The primary method that we use to quantify and manage interest rate risk is simulation analysis, which is used to model net interest income from assets and liabilities over a specified time period under various interest rate scenarios and balance sheet structures. This analysis measures the sensitivity of net interest income over a relatively short time horizon. Key assumptions in the simulation analysis relate to the behavior of interest rates and spreads, the changes in product balances, and the behavior of loan and deposit customers in different rate environments.

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Table 20 illustrates the expected effect on net interest income for the twelve months following each of the two year-ends 2009 and 2008 due to an immediate change in interest rates. Estimated changes set forth below are dependent on material assumptions, such as those previously discussed.

Table 20: Effect on Net Interest Income

	2009					2008
(dollars in thousands)	Change in Net Interest Income					Change in Net Interest Income
	Amount			%		Amount			%
Change in Interest Rates:
+200 basis points	$	(4,861	)	(5.07	)%	$	(4,338	)	(4.08	)%
+100 basis points		(2,129	)	(2.22	)%		(2,382	)	(2.24	)%
-100 basis points		N/A		N/A			N/A		N/A
-200 basis points		N/A		N/A			N/A		N/A

As of both December 31, 2009 and 2008, we were liability-sensitive, meaning that we project a decrease in net interest income assuming an immediate increase in interest rates.

It should be noted, however, that the simulation analysis is based upon equivalent changes in interest rates for all categories of assets and liabilities. In normal operating conditions, interest rate changes rarely occur in such a uniform manner. Many factors affect the timing and magnitude of interest rate changes on financial instruments. In addition, management may deploy strategies that offset some of the impact of changes in interest rates. Consequently, variations should be expected from the projections resulting from the controlled conditions of the simulation analysis. Management maintains a simulation model where it is assumed that interest rate changes occur gradually, that rate increases for interest-bearing liabilities lag behind the rate increases of interest-earning assets, and that the level of deposit rate increases will be less than the level of rate increases for interest-earning assets. In this model, we project an increase in net interest income due to rising rates during the twelve months following December 31, 2009.

Caution About Forward-Looking Statements

Where appropriate, statements in this report may contain the insights of management into known events and trends that have or may be expected to have a material effect on our operations and financial condition. The information presented may also contain certain forward-looking statements regarding future financial performance, which are not historical facts and which involve various risks and uncertainties.

When or if used in any Securities and Exchange Commission filings, or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases: “anticipate,” “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “is estimated,” “is projected,” or similar expressions are intended to identify “forward-looking statements.”

For a discussion of the risks, uncertainties and assumptions that could affect our future events, developments or results, you should carefully review the risk factors summarized below and the more detailed discussions in the “Risk Factors” and “Business” sections in the 2009 Form 10-K. Our risks include, without limitation, the following:

• We incurred significant losses in 2009 and may continue to do so in the future, and we can make no assurances as to when we will be profitable;

• We need to raise additional capital that may not be available to us;

• We may not be able to successfully maintain our regulatory capital, which may adversely affect our results of operations and financial condition;

• BOHR is restricted from accepting brokered deposits and offering interest rates on deposits that are substantially higher than the prevailing rates in our market;

• We expect to enter into a written agreement with the Federal Reserve, which will require us to designate a significant amount of resources to complying with the agreement;

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• We may become subject to additional regulatory restrictions in the event that our regulatory capital levels continue to decline;

• Our estimate for losses in our loan portfolio may be inadequate, which would cause our results of operations and financial condition to be adversely affected;

• We have had and may continue to have large numbers of problem loans and difficulties with our loan administration, which could increase our losses related to loans;

• Our lack of eligibility to continue to use a short form registration statement on Form S-3 may affect our short-term ability to access the capital markets;

• We did not undergo a “stress test” under the Federal Reserve’s Supervisory Capital Assessment Program; our self-administered stress test differed from the Supervisory Capital Assessment Program and the results of our test may be inaccurate;

• We have had a significant turnover in our senior management team;

• Governmental regulation and regulatory actions against us may impair our operations or restrict our growth;

• If the value of real estate in our core market areas were to decline materially, a significant portion of our loan portfolio could become under-collateralized;

• Our construction and land development, commercial real estate, and equity line lending may expose us to a greater risk of loss and hurt our earnings and profitability;

• Our lending on vacant land may expose us to a greater risk of loss and may have an adverse effect on operations;

• Difficult market conditions have adversely affected our industry;

• A significant part of Gateway’s loan portfolio is unseasoned;

• We are not paying dividends on our preferred stock or Common Stock and are deferring distributions on our trust preferred securities, and we are prevented in otherwise paying cash dividends on our Common Stock. The failure to resume paying dividends on our Series C Preferred Stock and trust preferred securities may adversely affect us;

• The Company can give no assurance that its deferred tax asset will not become impaired in the future because it is based on projections of future earnings, which are subject to uncertainty and estimates that may change based on economic conditions.

• Our ability to maintain adequate sources of funding may be negatively impacted by the current economic environment which may, among other things, impact our ability to pay dividends or satisfy our obligations;

• Our ability to maintain adequate sources of liquidity may be negatively impacted by the current economic environment which may, among other things, impact our ability to pay dividends or satisfy our obligations;

• The current economic environment may negatively impact our financial condition, required capital levels or otherwise negatively impact our financial condition, which may, among other things, limit our access to certain sources of funding and liquidity;

• We may face increasing deposit-pricing pressures, which may, among other things, reduce our profitability;

• We may incur additional losses if we are unable to successfully manage interest rate risk;

• Certain built-in losses could be limited if we experience an ownership change as defined in the Internal Revenue Code;

• A substantial decline in the value of our equity investments including our FHLB Common Stock may result in an other-than-temporary impairment charge;

• Our future success is dependent on our ability to compete effectively in the highly competitive banking industry;

• Our operations and customers might be affected by the occurrence of a natural disaster or other catastrophic event in our market area;

• We face a variety of threats from technology based frauds and scams;

• Virginia law and the provisions of our articles of incorporation and bylaws could deter or prevent takeover attempts by a potential purchaser of our Common Stock that would be willing to pay you a premium for your shares of our Common Stock;

• Our directors and officers have significant voting power;

• Our management has identified a material weakness in our internal control over financial reporting which if not properly remediated could result in material misstatements in our future interim and annual financial statements and have a material adverse effect on our business, financial condition, and results of operations and the price of our common stock.

• We may be unable to recruit, motivate, and retain qualified employees.

• Current levels of market volatility are unprecedented;

• The Company has issued three series of preferred stock that have rights that are senior to those of its common shareholders;

• If we are unable to redeem the Series C Preferred Stock prior to January 1, 2014, the cost of this capital to us will increase substantially;

• Because of our participation in TARP, we are subject to several restrictions including restrictions on compensation paid to our executives;

• Because of our financial condition and the compensation restrictions due to our participation in TARP, we have had and may continue to have difficulties recruiting and retaining qualified employees;

• Our business, financial condition, and results of operations are highly regulated and could be adversely affected by new or changed regulations and by the manner in which such regulations are applied by regulatory authorities;

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• Current and future increases in FDIC insurance premiums, including the FDIC special assessment imposed on all FDIC-insured institutions, will decrease our earnings. In addition, FDIC insurance assessments for BOHR will likely increase from not maintaining a “well capitalized” status, which would further decrease earnings;

• Banking regulators have broad enforcement power, but regulations are meant to protect depositors and not investors;

• The fiscal, monetary, and regulatory policies of the Federal Government and its agencies could have a material adverse effect on our results of operations;

• There can be no assurance that recently enacted legislation will stabilize the U.S. financial system;

• The impact on us of recently enacted legislation, in particular EESA and ARRA and their implementing regulations, and actions by the FDIC, cannot be predicted at this time;

• The soundness of other financial institutions could adversely affect us; and

Our forward-looking statements could be wrong in light of these and other risks, uncertainties, and assumptions. The future events, developments, or results described in this report could turn out to be materially different. We have no obligation to publicly update or revise our forward-looking statements after the date of this report and you should not expect us to do so.

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

Hampton Roads Bankshares, Inc.

Norfolk, Virginia

We have audited Hampton Roads Bankshares, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment.

• Inadequate controls over the accounting for income taxes. The Company lacked sufficient personnel with adequate technical skills related to accounting for income taxes.

• Ineffective controls over the accounting for certain loan transactions. Specifically, the Company lacked adequate controls over accounting for loans or partial loans sold to other institutions and accounting for payments and accrual of interest on nonaccrual loans.

• Ineffective controls and procedures related to certain information technology applications and general computer controls. The Company did not maintain adequate controls to prevent unauthorized access to certain programs and data, and provide for periodic review and monitoring of access including analysis of segregation of duties conflicts.

• Weaknesses within the area of Human Resources were identified including inadequate controls over access to payroll data and a lack of procedures to review payroll changes and reconcile payroll data to supporting documentation.

This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2009 financial statements, and this report does not affect our report dated April 22, 2010, on those financial statements.

In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Hampton Roads Bankshares, Inc. has not maintained effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009 of Hampton Roads Bankshares, Inc. and subsidiaries and our report dated April 22, 2010, expressed an unqualified opinion.

Winchester, Virginia

April 22, 2010

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

Hampton Roads Bankshares, Inc.

Norfolk, Virginia

We have audited the accompanying consolidated balance sheets of Hampton Roads Bankshares, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hampton Roads Bankshares, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Hampton Roads Bankshares, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our report dated April 22, 2010, expressed an opinion that Hampton Roads Bankshares, Inc. had not maintained effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Winchester, Virginia

April 22, 2010

Consolidated Balance Sheets

December 31, 2009 and 2008

(in thousands, except share and per share data)	2009			2008
Assets:
Cash and due from banks	$	16,995		$	42,827
Interest-bearing deposits in other banks		43,821			4,975
Overnight funds sold and due from Federal Reserve Bank		139,228			510
Investment securities available-for-sale, at fair value		161,062			149,637
Restricted equity securities, at cost		29,779			27,795
Loans held for sale		12,615			5,064
Loans		2,426,692			2,599,526
Allowance for loan losses		(132,697	)		(51,218	)
Net loans		2,293,995			2,548,308
Premises and equipment, net		97,512			101,335
Interest receivable		8,788			12,272
Foreclosed real estate and repossessed assets, net of valuation allowance		8,867			5,092
Deferred tax assets, net		56,380			32,616
Intangible assets, net		12,839			98,367
Bank owned life insurance		48,354			46,603
Other assets		45,323			10,310
Total assets	$	2,975,558		$	3,085,711
Liabilities and Shareholders’ Equity:
Deposits:
Noninterest bearing demand	$	248,682		$	240,813
Interest bearing:
Demand		916,865			684,009
Savings		82,860			118,001
Time deposits:
Less than $100		889,788			858,787
$100 or more		356,845			394,536
Total deposits		2,495,040			2,296,146
Federal Home Loan Bank borrowings		228,215			279,065
Other borrowings		49,254			77,223
Overnight funds purchased		—			73,300
Interest payable		3,572			5,814
Other liabilities		18,481			9,354
Total liabilities		2,794,562			2,740,902
Commitments and contingencies		—			—
Shareholders’ equity:
Preferred stock - 1,000,000 shares authorized:
Series A non-convertible, non-cumulative perpetual preferred stock, $1,000 liquidation value, 23,266 shares issued and outstanding on December 31, 2009 and 2008		19,919			18,292
Series B non-convertible, non-cumulative perpetual preferred stock, $1,000 liquidation value, 37,550 shares issued and outstanding on December 31, 2009 and 2008		39,729			40,953
Series C fixed rate, cumulative preferred stock, $1,000 liquidation value, 80,347 shares issued and outstanding on December 31, 2009 and 2008		75,322			74,297
Common stock, $0.625 par value, 100,000,000 shares authorized on December 31, 2009 and 70,000,000 shares authorized on December 31, 2008; 22,154,320 shares issued and outstanding on December 31, 2009 and 21,777,937 on December 31, 2008		13,846			13,611
Capital surplus		165,391			171,284
Retained earnings (deficit)		(132,466	)		26,482
Accumulated other comprehensive loss, net of tax		(745	)		(110	)
Total shareholders’ equity		180,996			344,809
Total liabilities and shareholders’ equity	$	2,975,558		$	3,085,711

See accompanying notes to the consolidated financial statements.

37

Consolidated Statements of Operations

Years ended December 31, 2009, 2008, and 2007

(in thousands, except share and per share data)	2009			2008			2007
Interest Income:
Loans, including fees	$	142,969		$	43,201		$	35,604
Investment securities		6,339			1,677			2,316
Overnight funds sold		99			53			35
Interest bearing deposits in other banks		38			246			248
Total interest income		149,445			45,177			38,203
Interest Expense:
Deposits:
Demand		7,512			1,030			678
Savings		1,110			1,741			2,866
Time deposits:
Less than $100		14,513			6,536			4,061
$100 or more		12,880			4,785			4,052
Interest on deposits		36,015			14,092			11,657
Federal Home Loan Bank borrowings		4,184			3,160			2,274
Other borrowings		3,704			609			—
Overnight funds purchased		391			56			85
Total interest expense		44,294			17,917			14,016
Net interest income		105,151			27,260			24,187
Provision for loan losses		134,223			1,418			1,232
Net interest income (expense) after provision for loan losses		(29,072	)		25,842			22,955
Noninterest Income:
Service charges on deposit accounts		8,117			3,379			1,996
Mortgage banking revenue		4,642			—			—
Gain on sale of investment securities available-for-sale		4,274			457			—
Gain (loss) on sale of premises and equipment		(29	)		519			11
Extinguishment of debt charge		(1,962	)		—			—
Losses on foreclosed real estate		(1,204	)		—			—
Other-than-temporary impairment of securities (includes total other-than-temporary impairment losses of $2,659 and $561, net of $190 and $0 recognized in other comprehensive income for the years ended December 31, 2009 and 2008, respectively, before taxes)		(2,469	)		(561	)		—
Insurance revenue		4,901			—			—
Brokerage revenue		354			—			—
Income from bank owned life insurance		1,658			—			—
Other		4,043			2,186			1,433
Total noninterest income		22,325			5,980			3,440
Noninterest Expense:
Salaries and employee benefits		42,285			11,518			9,954
Occupancy		9,044			2,261			1,668
Data processing		5,368			1,189			612
Impairment of goodwill		84,837			—			—
FDIC insurance		5,661			262			42
Equipment		4,735			663			343
Other		18,865			5,094			3,375
Total noninterest expense		170,795			20,987			15,994
Income (loss) before provision for income taxes (benefit)		(177,542	)		10,835			10,401
Provision for income taxes (benefit)		(32,075	)		3,660			3,590
Net income (loss)		(145,467	)		7,175			6,811
Preferred stock dividend and accretion of discount		8,689			—			—
Net income (loss) available to common shareholders	$	(154,156	)	$	7,175		$	6,811
Per Share:
Cash dividends declared	$	0.22		$	0.44		$	0.43
Basic earnings (loss)	$	(7.07	)	$	0.60		$	0.67
Diluted earnings (loss)	$	(7.07	)	$	0.59		$	0.65
Basic weighted average shares outstanding		21,816,407			11,960,604			10,228,638
Effect of dilutive stock options and non-vested stock		—			114,121			202,916
Diluted weighted average shares outstanding		21,816,407			12,074,725			10,431,554

See accompanying notes to the consolidated financial statements.

38

Consolidated Statements of Changes in Shareholders’ Equity

Years ended December 31, 2009, 2008, and 2007

															Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
(in thousands, except share data)	Preferred Stock			Common Stock					Capital Surplus			Retained Earnings
	Shares	Amount		Shares		Amount
Balance at December 31, 2006	—	$	—	10,251,336		$	6,407		$	42,106		$	22,091		$	(441	)	$	70,163
Comprehensive income:
Net income	—		—	—			—			—			6,811			—			6,811
Change in unrealized loss on securities available-for-sale, net of taxes of $253	—		—	—			—			—			—			491			491
Total comprehensive income																			7,302
Shares issued related to:
401(k) plan	—		—	11,020			7			130			—			—			137
Executive savings plan	—		—	11,686			7			138			—			—			145
Regional board fees	—		—	1,893			1			23			—			—			24
Exercise of stock options	—		—	93,599			59			648			—			—			707
Dividend reinvestment	—		—	165,991			104			2,146			—			—			2,250
Stock-based compensation	—		—	11,864			7			330			—			—			337
Common stock repurchased	—		—	(232,490	)		(145	)		(2,962	)		—			—			(3,107	)
Tax benefit of stock option exercises	—		—	—			—			118			—			—			118
Common stock cash dividends ($0.43 per share)	—		—	—			—			—			(4,416	)		—			(4,416	)
Balance at December 31, 2007	—	$	—	10,314,899		$	6,447		$	42,677		$	24,486		$	50		$	73,660
Comprehensive income:
Net income	—		—	—			—			—			7,175			—			7,175
Change in unrealized loss on securities available-for-sale, net of taxes of ($118)	—		—	—			—			—			—			(229	)		(229	)
Reclassification adjustment for securities gains included in net income, net of taxes of $35	—		—	—			—			—			—			69			69
Total comprehensive income																			7,015
Shares issued related to:
Executive savings plan	—		—	11,582			7			114			—			—			121
Regional board fees	—		—	8,510			5			105			—			—			110
Exercise of stock options	—		—	112,964			71			509			—			—			580
Dividend reinvestment	—		—	201,460			126			2,117			—			—			2,243
Stock-based compensation	—		—	32,908			20			129			—			—			149
Acquisition of Shore Financial Corporation	—		—	2,713,425			1,696			29,509			—			—			31,205
Acquisition of Gateway Financial Holdings	—		—	8,513,595			5,321			88,839			—			—			94,160
Series A non-cumulative perpetual preferred stock	23,266		18,292	—			—			—			—			—			18,292
Series B non-cumulative perpetual preferred stock	37,550		40,953	—			—			—			—			—			40,953
Series C fixed rate cumulative preferred stock and warrant	80,347		74,297	—			—			6,050			—			—			80,347
Common stock repurchased	—		—	(131,406	)		(82	)		(1,372	)		—			—			(1,454	)
Options acquired in mergers	—		—	—			—			2,587			—			—			2,587
Tax benefit of stock option exercises	—		—	—			—			20			—			—			20
Common stock cash dividends ($0.44 per share)	—		—	—			—			—			(5,179	)		—			(5,179	)
Balance at December 31, 2008	141,163	$	133,542	21,777,937		$	13,611		$	171,284		$	26,482		$	(110	)	$	344,809
Comprehensive income:
Net loss	—		—	—			—			—			(145,467	)		—			(145,467	)
Change in unrealized loss on securities available-for-sale, net of taxes of $207	—		—	—			—			—			—			513			513
Reclassification adjustment for securities gains included in net income, net of taxes of ($657)	—		—	—			—			—			—			(1,148	)		(1,148	)
Total comprehensive income																			(146,102	)
Shares issued related to:
Regional board fees	—		—	73,676			46			118			—			—			164
Exercise of stock options	—		—	86,243			54			559			—			—			613
Dividend reinvestment	—		—	68,748			43			488			—			—			531
Stock-based compensation	—		—	80,765			50			580			—			—			630
Private placement shares	—		—	136,771			86			220									306
Common stock repurchased	—		—	(69,820	)		(44	)		(500	)		—			—			(544	)
Amortization of fair market value adjustment	—		403	—			—			—			—			—			403
Tax benefit of stock option exercises	—		—	—			—			142			—			—			142
Stock financed	—		—	—			—			(7,500	)		—			—			(7,500	)
Preferred stock dividend declared and amortization of preferred stock discount	—		1,025	—			—						(8,689	)		—			(7,664	)
Common stock cash dividends ($0.22 per share)	—		—	—			—			—			(4,792	)		—			(4,792	)
Balance at December 31, 2009	141,163	$	134,970	22,154,320		$	13,846		$	165,391		$	(132,466	)	$	(745	)	$	180,996

See accompanying notes to the consolidated financial statements.

39

Consolidated Statements of Cash Flows

Years ended December 31, 2009, 2008, and 2007

(in thousands)	2009			2008			2007
Operating Activities:
Net income (loss)	$	(145,467	)	$	7,175		$	6,811
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		5,511			1,407			886
Amortization of intangible assets and fair value adjustments		(8,263	)		133			—
Provision for loan losses		134,223			1,418			1,232
Deferred board fees		164			110			24
Proceeds from mortgage loans held for sale		259,783			—			—
Originations of mortgage loans held for sale		(267,334	)		—			—
Stock-based compensation expense		630			149			337
Net amortization of premiums and accretion of discounts on investment securities		(2,680	)		(62	)		7
(Gain) loss on sale of premises and equipment		29			(519	)		(11	)
Losses on foreclosed real estate and repossesed assets		1,204			—			—
Gain on sale of investment securities available-for-sale		(4,274	)		(457	)		—
Gain on sale of loans		(51	)		—			—
Earnings on bank owned life insurance		(1,658	)		—			—
Other-than-temporary impairment of securities		2,469			561			—
Impairment of goodwill		84,837			—			—
Deferred income tax expense (benefit)		(23,032	)		(836	)		(568	)
Changes in:
Interest receivable		2,435			20			(149	)
Other assets		(38,200	)		107			(6	)
Interest payable		(2,242	)		304			163
Other liabilities		3,888			787			672
Net cash provided by operating activities		1,972			10,297			9,398
Investing Activities:
Proceeds from maturities and calls of debt securities available-for-sale		45,799			11,215			15,171
Proceeds from sale of investment securities available-for-sale		84,121			18,457			—
Purchase of debt securities available-for-sale		(137,569	)		(2,000	)		(1,242	)
Purchase of equity securities available-for-sale		—			(1,006	)		—
Proceeds from sales of restricted equity securities		9,824			5,024			1,040
Purchase of restricted equity securities		(11,787	)		(6,885	)		(1,769	)
Proceeds from the sale of loans		697			—			—
Net (increase) decrease in loans		100,575			(111,879	)		(102,195	)
Purchase of premises and equipment		(2,901	)		(4,499	)		(720	)
Proceeds from sale of foreclosed real estate		4,707			—			15
Proceeds from sale of premises and equipment		178			764			37
Net cash provided by (used in) investing activities		93,644			(90,809	)		(89,663	)
Financing Activities:
Net increase (decrease) in deposits		212,908			(37,499	)		68,196
Proceeds from Federal Home Loan Bank borrowings		49,450			226,912			23,000
Repayments of Federal Home Loan Bank borrowings		(94,016	)		(218,445	)		(8,000	)
Net increase (decrease) in overnight funds borrowed		(73,300	)		16,000			—
Net increase (decrease) in other borrowings		(28,000	)		28,000			—
Cash exchanged in mergers		—			11,614			—
Common stock repurchased		(544	)		(1,446	)		(2,877	)
Issuance of private placement shares		306			—			—
Issuance of shares to 401(k) plan		—			—			137
Issuance of shares to executive savings plan		—			121			146
Issuance of Series C preferred stock and warrant		—			80,347			—
Proceeds from exercise of stock options		613			572			476
Excess tax benefit realized from stock options exercised		142			20			118
Preferred stock dividends paid and amortization of preferred stock discount		(7,182	)		—			—
Common stock dividends paid, net of reinvestment		(4,261	)		(2,936	)		(2,166	)
Net cash provided by financing activities		56,116			103,260			79,030
Increase (decrease) in cash and cash equivalents		151,732			22,748			(1,235	)
Cash and cash equivalents at beginning of period		48,312			25,564			26,799
Cash and cash equivalents at end of period	$	200,044		$	48,312		$	25,564

40

	2009			2008			2007
Supplemental cash flow information:
Cash paid for interest	$	46,536		$	17,613		$	13,852
Cash paid for income taxes		13,714			4,600			4,085
Supplemental non-cash information:
Dividends reinvested	$	531		$	2,243		$	2,250
Value of shares exchanged in exercise of stock options		—			8			231
Change in unrealized gain (loss) on securities		(957	)		(243	)		744
Transfer between loans and other real estate owned		9,686			1,372			50
Transfer between premises and equipment and loans		—			—			25
Stock financed		7,500			—			—
Transactions related to acquisitions:
Increase in assets and liabilities:
Loans, net		—		$	1,972,398		$	—
Securities		—			155,507			—
Other assets		—			267,637			—
Deposits		—			1,902,462			—
Borrowings		—			324,293			—
Other liabilities		—			8,366			—
Issuance of preferred stock		—			59,245			—
Issuance of common stock and stock options		—			127,952			—

See accompanying notes to the consolidated financial statements.

41

Notes to Consolidated Financial Statements

December 31, 2009, 2008, and 2007

(1) Basis of Financial Statement Presentation and Summary of Significant Accounting Policies

Basis of Presentation. Hampton Roads Bankshares, Inc. (the “Company”) is a multi-bank holding company incorporated in 2001 under the laws of the Commonwealth of Virginia. The consolidated financial statements of Hampton Roads Bankshares, Inc. include the accounts of the Company and its wholly-owned subsidiaries: Bank of Hampton Roads (“BOHR”), Shore Bank (“Shore”), and Hampton Roads Investments, Inc., as well as their wholly owned subsidiaries: Bank of Hampton Roads Service Corporation; Gateway Bank Mortgage, Inc.; Gateway Investment Services, Inc.; Gateway Insurance Services, Inc.; Gateway Title Agency, Inc.; Shore Investments, Inc.; and Insurance Express Premium Finance. The Company also owns Gateway Capital Statutory Trust I, Gateway Capital Statutory Trust II, Gateway Capital Statutory Trust III, and Gateway Capital Statutory Trust IV. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2009-17, the Gateway Capital Trusts are not consolidated as part of the Company’s consolidated financial statements. However, the junior subordinated debentures issued by the Company to the trusts are included in long-term borrowings and the Company’s equity interest in the trusts is included in other assets. Additionally, all significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates. The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates. Material estimates that are particularly susceptible to changes in the near term are the allowance for loan losses, the valuation of deferred tax assets, the fair value of stock options, and the estimated fair value of financial instruments.

Summary of Significant Accounting Policies. The following is a summary of the significant accounting and reporting policies used in preparing the consolidated financial statements.

Cash and Due from Bank Accounts. For the purpose of presentation in the consolidated statements of cash flows, the Company considers cash and due from banks, overnight funds sold and due from Federal Reserve Bank, and interest-bearing deposits in other banks as cash and cash equivalents.

The Company is required to maintain average reserve balances in cash with the Federal Reserve Bank (“FRB”). The amounts of daily average required reserves for the final weekly reporting period were $26.4 million and $4.1 million at December 31, 2009 and 2008, respectively.

Investment Securities. Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Trading securities are recorded at fair value with changes in fair value included in earnings. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available-for-sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Impairment of securities occurs when the fair value of the security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either we intend to sell the security or it is more-likely-than-not that we will be required to sell the security before recovery of its amortized cost basis. If, however, we do not intend to sell the security and it is not more-likely-than-not that we will be required to sell the security before recovery, we must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is credit loss, the loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income. For equity securities, impairment is considered to be other-than-temporary based on our ability and intent to hold the

42

investment until a recovery of fair value. Other-than-temporary impairment of an equity security results in a write-down that must be included in net income. We regularly review each investment security for other-than-temporary impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, our best estimate of the present value of cash flows expected to be collected from debt securities, our intention with regard to holding the security to maturity, and the likelihood that we would be required to sell the security before recovery.

Prior to the adoption of the recent accounting guidance on April 1, 2009, management considered, in determining whether other-than-temporary impairment exists, the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

For equity securities, when the Company has decided to sell an impaired available-for-sale security and the entity does not expect the fair value of the security to fully recover before the expected time of sale, the security is deemed other-than-temporarily impaired in the period in which the decision to sell is made. The Company recognizes an impairment loss when the impairment is deemed other-than-temporary even if a decision to sell has not been made.

Restricted Equity Securities. As a requirement for membership, the Company invests in stock of the Federal Home Loan Bank of Atlanta (“FHLB”), Community Bankers’ Bank, and FRB. These investments are carried at cost due to the redemption provisions of these entities and the restricted nature of the securities. Management reviews for impairment based on the ultimate recoverability of the cost basis of these stocks.

Loans. The Company grants mortgage, commercial, and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans throughout Virginia and North Carolina. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred over the life of the loan and recognized as an adjustment of the related loan yield using the interest and straight-line methods. Net fees related to standby letters of credit are recognized over the commitment period. In those instances when a loan prepays, the remaining deferred fee is recognized in the income statement.

As a general rule, loans are placed in nonaccrual status when principal or interest is 90 days or more past due. The delinquency status of the loan is determined by the contractual terms of the loan. Accrual of interest ceases at that time and uncollected past due interest is reversed. Cash payments received on loans in nonaccrual status are generally applied to reduce the outstanding principal balance, however, during 2009, cash payments in the amount of $1.2 million were recorded as interest income on nonaccrual loans. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses. The allowance for loan losses is a valuation allowance consisting of the cumulative effect of the provision for loan losses, less loans charged off, in addition to any amounts recovered on loans previously charged off. The provision for loan losses is the amount necessary, in management’s judgment, to maintain the allowance for loan losses at a level it believes sufficient to cover incurred losses in the collection of the Company’s loans. Loans are charged against the allowance when, in management’s opinion, they are deemed uncollectible. Recoveries of loans previously charged off are credited to the allowance when realized.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

43

A loan is deemed impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Certain loans are individually evaluated for impairment in accordance with the Company’s ongoing loan review procedures. Smaller balance homogeneous loans are collectively evaluated for impairment. Impaired loans are measured at the present value of their expected future cash flows by discounting those cash flows at the loan’s effective interest rate or at the loan’s observable market price or the fair value of collateral if the loan is collateral dependent. The difference between this discounted amount and the loan balance is recorded as an allowance for loan losses. Once a loan is considered impaired, it continues to be considered impaired until the collection of scheduled interest and principal is considered probable or the balance is charged off.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical loss experience, risk characteristics of the various categories of loans, adverse situations affecting individual loans, loan risk grades, estimated value of any underlying collateral, and prevailing economic conditions. Further adjustments to the allowance for loan losses may be necessary based on changes in economic and real estate market conditions, further information regarding known problem loans, results of regulatory examinations, the identification of additional problem loans, and other factors. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

Loans Held for Sale. The Company originates single family, residential, first lien mortgage loans that have been approved by secondary market investors. The Company classifies loans originated with the intent of selling them in the secondary market as held for sale. Loans originated for sale are primarily sold in the secondary market as whole loans. Whole loan sales are executed with the servicing rights being released to the buyer upon the sale, with the gain or loss on the sale equal to the difference between the proceeds received and the carrying value of the loans sold.

Mortgage loans held for sale are carried at the lower of cost or fair value in the aggregate. The fair value of mortgage loans held for sale is determined using current secondary market prices for loans with similar coupons, maturities, and credit quality. The fair value of mortgage loans held for sale is impacted by changes in market interest rates. Net unrealized losses, if any, are recognized through a valuation allowance.

The Company enters into commitments to originate or purchase loans whereby the interest rate of the loan was determined prior to funding (“interest rate lock commitments”). Interest rate lock commitments on mortgage loans that the Company intended to sell in the secondary market were considered freestanding derivatives. These derivatives are carried at fair value with changes in fair value reported as a component of gain on sale of the loans in accordance with the Securities and Exchange Commission’s Staff Account Bulletin No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings.

Premises and Equipment. Land is reported at cost, while premises and equipment are reported at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from three years for equipment to 40 years for premises. Leasehold improvements are amortized on a straight-line basis over the terms of the respective leases, including renewal options, or the estimated useful lives of the improvements, whichever is shorter. Routine holding costs are charged to expense as incurred, while significant improvements are capitalized.

Goodwill and Other Intangibles. Accounting Standards Codification (“ASC”) 350, Intangibles – Goodwill and other Intangibles, states goodwill is not subject to amortization over its estimated useful life, but is subject to an annual assessment for impairment by applying a fair value based test. Additionally, acquired intangible assets are separately recognized if the benefit of the assets can be sold, transferred, licensed, rented, or exchanged; they are amortized over their estimated useful life.

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Foreclosed Real Estate and Repossessed Assets. Foreclosed real estate and repossessed assets include real estate acquired in the settlement of loans and other repossessed collateral. Real estate acquired in settlement of loans is initially recorded at the lower of the recorded loan balance or fair market value less estimated disposal costs. At foreclosure any excess of the loan balance over the fair value of the property is charged to the allowance for loan losses. Such carrying value is periodically reevaluated and written down if there is an indicated decline in fair value. Costs to bring a property to salable condition are capitalized up to the fair value of the property while costs to maintain a property in salable condition are expensed as incurred. Gains and losses on sales of foreclosed real estate and valuation allowance are recognized in noninterest income upon disposition.

Long-Lived Assets. The Company accounts for long-lived assets in accordance with ASC 360, Property, Plant, and Equipment, which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Bank Owned Life Insurance. The Company purchased life insurance policies on the lives of certain officers. The policies are recorded as an asset at the cash surrender value of the policies. Increases or decreases in the cash surrender value, other than proceeds from death benefits, are recorded as noninterest income. Proceeds from death benefits first reduce the cash surrender value attributable to the individual policy and then any additional proceeds are recorded as noninterest income.

Revenue Recognition. Revenue earned on interest-earning assets is recognized based on the effective yield of the financial instrument. Service charges on deposit accounts are recognized as charged. Credit-related fees, including letter of credit fees, are recognized in noninterest income when earned.

Insurance commission income is recorded as of the effective date of insurance coverage or the billing date, whichever is later. Contingent commissions are recognized when determinable, which is generally when such commissions are received or when the Company receives data from the insurance companies that allow the reasonable estimation of these amounts. The income effects of subsequent premium and fee adjustments are recorded when the adjustments become known.

Advertising Costs. Advertising costs are expensed as incurred.

Stock-Based Compensation. According to ASC 718, Compensation – Stock Compensation, the Company uses the fair value method, which requires that compensation cost relating to stock based transactions be recognized in the financial statements, to account for stock-based compensation and the fair value of stock options is estimated at the date of grant using a lattice option pricing model. Stock options granted with pro rata vesting schedules are expensed over the vesting period on a straight line basis.

Income Taxes. Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

ASC 740, Income Taxes, clarifies the accounting for uncertainty in income taxes recognized in the financial statement and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority.

A deferred tax liability is recognized for all temporary differences that will result in future taxable income; a deferred tax asset is recognized for all temporary differences that will result in future tax deductions, subject to reduction of the asset by a valuation allowance in certain circumstances. This valuation allowance is recognized if, based on an analysis of available evidence, management determines that it is more likely than not that some portion or all of the deferred tax asset will not be realized. The valuation allowance is subject to ongoing adjustment based on changes in circumstances that affect management’s judgment about the realizability of the deferred tax asset. Adjustments to increase or decrease the valuation allowance are charged or credited, respectively, to income tax expense. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.

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Per Share Data. Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the dilutive effect of stock options and non-vested stock using the treasury stock method. For the year ended December 31, 2009, all options were anti-dilutive since the Company had a net loss available to common shareholders. There were 249,288 average anti-dilutive stock options for the year ended December 31, 2008, and there were no anti-dilutive stock options for the year ended December 31, 2007.

Comprehensive Income (Loss). Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income or loss. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with the operating net income or loss, are components of comprehensive income or loss.

Credit Related Financial Instruments. In the ordinary course of business, the Company has entered into commitments to extend credit including commitments under home equity lines of credit, overdraft protection arrangements, commercial lines of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.

Concentrations of Credit Risk. Construction and mortgage loans represented 83% and 81% of the total loan portfolio at December 31, 2009 and 2008, respectively. Substantially all such loans are collateralized by real property. Loans in these categories and their collateral values are continuously monitored by management.

At times the Company may have cash and cash equivalents at a financial institution in excess of insured limits. The Company places its cash and cash equivalents with high credit quality financial institutions whose credit rating is monitored by management to minimize credit risk. The amount on deposit with correspondent institutions at December 31, 2009 exceeded the insurance limits of the Federal Deposit Insurance Corporation by $386 thousand.

Reclassification. Certain 2008 and 2007 amounts have been reclassified to conform to the 2009 presentation.

Recent Accounting Pronouncements

In June 2009, FASB issued new accounting guidance related to U.S. GAAP, ASC 105, Generally Accepted Accounting Principles. This guidance establishes FASB ASC as the source of authoritative U.S. GAAP recognized by FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. FASB ASC supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in FASB ASC has become non-authoritative. FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue ASUs, which will serve to update FASB ASC, provide background information about the guidance, and provide the basis for conclusions on the changes to FASB ASC. FASB ASC is not intended to change U.S. GAAP or any requirements of the SEC.

The Company adopted new guidance impacting ASC 805, Business Combinations on January 1, 2009. This guidance requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition), establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed, requires expensing of most transaction and restructuring costs, and requires the acquirer to disclose to investors and other users all of the information needed to evaluate and understand the nature and financial effect of the business combination. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued new guidance impacting ASC 805. This guidance addresses application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This guidance was effective for business combinations entered into on or after January 1, 2009. This guidance did not have a material impact on the Company’s consolidated financial statements.

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In April 2009, the FASB issued new guidance impacting ASC 820, Fair Value Measurements and Disclosures. This interpretation provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This also includes guidance on identifying circumstances that indicate a transaction is not orderly and requires additional disclosures of valuation inputs and techniques in interim periods and defines the major security types that are required to be disclosed. This guidance was effective for interim and annual periods ending after June 15, 2009 and should be applied prospectively. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued new guidance impacting ASC 320-10, Investments – Debt and Equity Securities. This guidance amends GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This guidance was effective for interim and annual periods ending after June 15, 2009, with earlier adoption permitted for periods ending after March 15, 2009. The additional disclosures required are included in the consolidated Statements of Operations and in Note 3 to the Company’s consolidated financial statements.

In May 2009, the FASB issued new guidance impacting ASC 855, Subsequent Events. This update provides guidance on management’s assessment of subsequent events that occur after the balance sheet date through the date that the financial statements are issued. This guidance is generally consistent with current accounting practice. In addition, it requires certain additional disclosures. This guidance was effective for periods ending after June 15, 2009 and the required disclosure is included as Note 27 to the Company’s consolidated financial statements.

In August 2009, the FASB issued new guidance impacting ASC 820. This guidance is intended to reduce ambiguity in financial reporting when measuring the fair value of liabilities. This guidance was effective for the first reporting period (including interim periods) after issuance and had no impact on the Company’s consolidated financial statements.

In September 2009, the FASB issued new guidance impacting ASC 820. This creates a practical expedient to measure the fair value of an alternative investment that does not have a readily determinable fair value. This guidance also requires certain additional disclosures. This guidance is effective for interim and annual periods ending after December 15, 2009. The Company does not expect the adoption of the new guidance to have a material impact on its consolidated financial statements.

In January 2010, the FASB issued ASU 2010-02, Consolidation: Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope Clarification. ASU 2010-02 amends ASC 810-10 to address implementation issues related to changes in ownership provisions including clarifying the scope of the decrease in ownership and additional disclosures. ASU 2010-02 is effective beginning in the period that an entity adopts Statement 160. If an entity has previously adopted Statement 160, ASU 2010-02 is effective beginning in the first interim or annual reporting period ending on or after December 15, 2009 and should be applied retrospectively to the first period Statement 160 was adopted. The Company does not expect the adoption of ASU 2010-02 to have a material impact on its consolidated financial statements.

In January 2010, the FASB issued ASU 2010-01, Equity: Accounting for Distributions to Shareholders with Components of Stock and Cash – a Consensus of the FASB Emerging Issues Task Force. ASU 2010-01 clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend. ASU 2010-01 is effective for interim and annual periods ending on or after December 15, 2009 and should be applied on a retrospective basis. The Company does not expect the adoption of ASU 2010-01 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued new guidance relating to the accounting for transfers of financial assets. The new guidance, which was issued as Statement of Financial Accounting Standards (“SFAS”) No. 166, Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140, was adopted into Codification in December 2009 through the issuance of ASU 2009-16. The new standard provides guidance to improve the relevance, representational faithfulness, and comparability of the information that an entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. The Company will adopt the new guidance in 2010 and is evaluating the impact it will have, if any, on its consolidated financial statements.

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In June 2009, the FASB issued new guidance relating to the variable interest entities. The new guidance, which was issued as SFAS No. 167, Amendments to FASB Interpretation No. 46(R), was adopted into Codification in December 2009. The objective of the guidance is to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. SFAS No. 167 is effective as of January 1, 2010. The Company does not expect the adoption of the new guidance to have a material impact on its consolidated financial statements.

In October 2009, the FASB issued ASU 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. ASU 2009-15 amends Subtopic 470-20 to expand accounting and reporting guidance for own-share lending arrangements issued in contemplation of convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009 and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company does not expect the adoption of ASU 2009-15 to have a material impact on its consolidated financial statements.

In January 2010, the FASB issued ASU 2010-04, Accounting for Various Topics – Technical Corrections to SEC Paragraphs. ASU 2010-04 makes technical corrections to existing SEC guidance including accounting for subsequent investments, termination of an interest rate swap, issuance of financial statements - subsequent events, use of residential method to value acquired assets other than goodwill, adjustments in assets and liabilities for holding gains and losses, and selections of discount rate used for measuring defined benefit obligation. The Company does not expect the adoption of ASU 2010-04 to have a material impact on its consolidated financial statements.

In January 2010, the FASB issued ASU 2010-05, Compensation – Stock Compensation: Escrowed Share Arrangements and the Presumption of Compensation. ASU 2010-05 updates existing guidance to address the SEC staff’s views on overcoming the presumption that for certain shareholders escrowed share arrangements represent compensation. The Company does not expect the adoption of ASU 2010-05 to have a material impact on its consolidated financial statements.

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures: Improving Disclosures About Fair Value Measurements. ASU 2010-06 amends ASC 820-10 to clarify existing disclosures, require new disclosures, and include conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company does not expect the adoption of ASU 2010-06 to have a material impact on its consolidated financial statements.

In February 2010, the FASB issued ASU 2010-08, Technical Corrections to Various Topics. ASU 2010-08 clarifies guidance on embedded derivatives and hedging. ASU 2010-08 is effective for interim and annual periods beginning after December 15, 2009. The Company does not expect the adoption of ASU 2010-08 to have a material impact on its consolidated financial statements.

(2) Mergers and Acquisitions

Shore Financial Corporation (“SFC”)

On June 1, 2008, the Company acquired all of the outstanding shares of SFC. The shareholders of SFC received, for each share of SFC common stock that they owned immediately prior to the effective time of the merger, either $22 per share in cash or 1.8 shares of the Company’s common stock. In addition, at the effective time of the merger, each outstanding option to purchase shares of SFC’s common stock under any stock plans vested pursuant to its terms and was converted into an option to acquire the number of shares of the Company’s common stock

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equal to the number of shares of SFC common stock underlying the option multiplied by 1.8. The exercise price of each option was adjusted accordingly. The aggregate purchase price was $58.1 million, including common stock valued at $31.2 million, SFC stock held by the Company as an investment of $800 thousand, stock options exchanged valued at $1.2 million, cash of $21.0 million, and direct costs of the merger of $3.9 million. Net assets (in thousands) acquired are shown in the table below.

Securities available-for-sale	$	16,250
Loans, net		220,450
Goodwill		27,898
Core deposit intangible		4,755
Employment agreement intangible		160
Other assets		33,587
Total assets acquired		303,100
Deposits		208,402
Borrowings		34,228
Other liabilities		2,409
Total liabilities assumed		245,039
Net assets acquired	$	58,061

The merger transaction was accounted for under the purchase method of accounting and is qualified as a tax-free reorganization under Section 368(a) of the Internal Revenue Code. The merger resulted in the recording of $27.9 million of goodwill and $4.8 million of core deposit intangible assets. During the second quarter of 2009, goodwill related to the SFC acquisition was determined to be impaired, and an impairment expense of $27.9 million was recorded. The core deposit intangible asset was based on an independent valuation and is being amortized over the estimated life of the core deposits of eight years, based on undiscounted cash flows. In order to finance the merger transaction, the Company borrowed $23.0 million, which was completely paid off during second quarter 2009.

Gateway Financial Holdings (“GFH”)

On December 31, 2008 the Company acquired all of the outstanding shares of GFH. The shareholders of GFH received, for each share of GFH common stock that they owned immediately prior to the effective time of the merger 0.67 shares of Company common stock. Each of GFH’s preferred shares outstanding immediately prior to the effective time of the merger converted into new preferred shares of the Company that have substantially identical rights. In addition, at the effective time of the merger, each outstanding option to purchase shares of GFH’s common stock under any stock plans were converted into an option to acquire the number of shares of Company common stock equal to the number of shares of GFH common stock underlying the option multiplied by 0.67. The exercise price of each option was adjusted accordingly. The aggregate purchase price was approximately $161.0 million, including common stock valued at $94.2 million, preferred stock valued at $59.3 million, GFH stock held by the Company as an investment of $200 thousand, stock options exchanged valued at $1.4 million, and direct costs of the merger of $5.9 million.

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Net assets acquired, based on fair value adjustments, are shown in the table below (in thousands).

Securities available-for-sale	$	117,706
Loans, net		1,752,793
Goodwill		56,939
Core deposit intangible		3,282
Other intangibles		7,485
Other assets		205,672
Total assets acquired		2,143,877
Deposits		1,688,473
Borrowings		289,497
Other liabilities		4,950
Total liabilities assumed		1,982,920
Net assets acquired	$	160,957

The merger transaction was accounted for under the purchase method of accounting and is qualified as a tax-free reorganization under Section 368(a) of the Internal Revenue Code. The merger resulted in the recording of $56.9 million of goodwill and $3.3 million of core deposit intangible assets. During the fourth quarter of 2009, goodwill related to the GFH acquisition was determined to be impaired, and an impairment expense of $56.9 million was recorded. The core deposit intangible assets were based on an independent valuation and will be amortized over the estimated life of the core deposits of 4.5 years, based on undiscounted cash flows.

Pro forma Financial Information

The Company’s consolidated financial statements include the results of operations of SFC and GFH from the date of acquisition. Pro forma condensed consolidated income statements (in thousands) for the years ended December 31, 2008 and 2007 are shown as if the mergers occurred at the beginning of each year as follows.

	2008			2007
Interest income	$	171,295		$	162,913
Interest expense		77,462			74,572
Net interest income		93,833			88,341
Provision for loan losses		44,874			6,059
Noninterest income (loss)		(11,456	)		24,605
Noninterest expense		85,438			70,860
Income (loss) before for income taxes		(47,935	)		36,027
Provision for income taxes (benefit)		(18,575	)		12,360
Net income (loss)	$	(29,360	)	$	23,667
Basis earnings (loss) per share	$	(1.36	)	$	1.10
Diluted earnings (loss) per share	$	(1.36	)	$	1.08

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(3) Investment Securities

The amortized cost and estimated fair values of investment securities available-for-sale (in thousands) at December 31, 2009 and 2008 were as follows.

	2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
State and municipal securities	$	1,279	$	27	$	—	$	1,306
U.S. agency securities		11,376		173		105		11,444
Mortgage-backed securities		146,583		482		1,339		145,726
Equity securities		2,966		3		383		2,586
Total investment securities available-for-sale	$	162,204	$	685	$	1,827	$	161,062
	2008
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
State and municipal securities	$	18,186	$	39	$	8	$	18,217
U.S. agency securities		24,584		415		—		24,999
Mortgage-backed securities		95,202		46		—		95,248
Corporate bonds		5,093		—		—		5,093
Equity securities		6,747		19		686		6,080
Total investment securities available-for-sale	$	149,812	$	519	$	694	$	149,637

Proceeds from sales of investment securities available-for-sale during 2009 were $84.1 million and resulted in gross realized gains of $4.3 million. For the year ended December 31, 2008, proceeds from available-for-sale securities amounted to $18.5 million and resulted in realized gains of $457 thousand. There were no sales of securities in 2007.

The amortized cost and estimated fair value of investment securities available-for-sale (in thousands) that are not determined to be other-than-temporarily impaired, by contractual maturity at December 31, 2009 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Equity securities do not have contractual maturities.

	2009
	Amortized Cost		Estimated Fair  Value
Due in one year or less	$	1,005	$	1,025
Due after one year but less than five years		1,012		1,089
Due after five years but less than ten years		9,569		9,557
Due after ten years		147,652		146,806
Equity securities		2,966		2,585
Total available-for-sale securities	$	162,204	$	161,062

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Information pertaining to securities with gross unrealized losses (in thousands) at December 31, 2009 and 2008, aggregated by investment category and length of time that the individual securities have been in a continuous loss position is as follows.

	2009
	Less than 12 Months				12 Months or More				Total
	Estimated Fair  Value		Unrealized Loss		Estimated Fair  Value		Unrealized Loss		Estimated Fair  Value		Unrealized Loss
Agency securities	$	4,711	$	105	$	—	$	—	$	4,711	$	105
Mortgage-backed securities		69,078		1,339		—		—		69,078		1,339
Equity securities		32		13		1,097		370		1,129		383
	$	73,821	$	1,457	$	1,097	$	370	$	74,918	$	1,827
	2008
	Less than 12 Months				12 Months or More				Total
	Estimated Fair  Value		Unrealized Loss		Estimated Fair  Value		Unrealized Loss		Estimated Fair  Value		Unrealized Loss
State and municipal securities	$	2,713	$	8	$	—	$	—	$	2,713	$	8
Mortgage-backed securities		—		—		5		—		5		—
Equity securities		1,281		360		147		326		1,428		686
	$	3,994	$	368	$	152	$	326	$	4,146	$	694

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Investment securities classified as available-for-sale are generally evaluated for OTTI in accordance with ASC 320, Investment – Debt and Equity Securities.

In determining OTTI, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current period credit loss. If an entity intends to sell or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, less any current period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

The unrealized loss positions on debt securities at December 31, 2009 were directly related to interest rate movements as there is minimal credit risk exposure in these investments. Debt securities with unrealized loss positions at December 31, 2009 included one agency security and 21 agency mortgage-backed securities. Management does not believe that any of these debt securities were other-than-temporarily impaired at December 31, 2009.

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In accordance with SAB Topic 5M, our impairment analysis considered all available evidence including the length of time and the extent to which the market value of each security was less than cost, the financial condition of the issuer of each equity security (based upon financial statements of the issuers), and the near term prospects of each issuer, as well as our intent and ability to retain these investments for a sufficient period of time to allow for any anticipated recovery in their respective market values. During 2009 and 2008, equity securities with an amortized cost basis of $5.4 million and $613 thousand, respectively, were determined to be other-than-temporarily impaired. Impairment losses of $2.5 million and $561 thousand were recognized through noninterest income during 2009 and 2008, respectively. An additional $190 thousand was included in accumulated other comprehensive loss in the equity section of the balance sheet as of December 31, 2009. Management has evaluated the unrealized losses associated with the remaining equity securities as of December 31, 2009 and, in management’s opinion, the unrealized losses are temporary and it is our intention to hold these securities until their value recovers. A rollforward of the cumulative other-than-temporary impairment losses (in thousands) recognized in earnings for all debt securities is as follows.

December 31, 2008	$	561
Loss where impairment was not previously recognized		2,469
December 31, 2009	$	3,030

The Company’s investment in FHLB stock totaled $19.7 million at December 31, 2009. FHLB stock is generally viewed as a long-term investment and as a restricted investment security and is carried at cost as there is no market for the stock other than the FHLB or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value. Despite the FHLB’s change in policy relating to repurchases of excess capital stock in 2009, the Company does not consider this investment to be other-than-temporarily impaired at December 31, 2009, and no impairment has been recognized.

Investment securities at estimated fair value (in thousands) that were pledged to secure deposits or outstanding borrowings or were pledged to secure potential future borrowings at December 31, 2009 and 2008 were as follows.

	2009		2008
Public deposits	$	34,219	$	32,116
Treasury, tax, and loan deposits		4,015		3,605
Federal Home Loan Bank borrowings		21,550		26,528
Federal Reserve Bank borrowings		2,115		7,755
Repurchase agreements		24,174		22,923
Housing and Urban Development		604		413
	$	86,677	$	93,340

(4) Loans and Allowance for Loan Losses

The Company grants commercial, construction, real estate, and consumer loans to customers throughout its lending areas. A substantial portion of debtors’ abilities to honor their contracts is dependent upon the real estate and general economic environment of the lending area. Overdrafts in the amount of $399 thousand and $332 thousand as of December 31, 2009 and 2008, respectively, were reclassified from deposits to loans.

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Major classifications of loans (in thousands) at December 31, 2009 and 2008 were as follows.

	2009			2008
Commercial	$	361,256		$	451,426
Construction		757,702			897,288
Real estate - commercial mortgage		740,570			673,351
Real estate - residential mortgage		524,853			528,760
Installment loans to individuals		42,858			50,085
Deferred loan fees and related costs		(547	)		(1,384	)
	$	2,426,692		$	2,599,526

Non-performing assets (in thousands) at December 31, 2009 and 2008 were as follows.

	2009		2008
Loans 90 days past due and still accruing interest	$	—	$	3,219
Nonaccrual loans, including nonaccrual impaired loans		248,303		32,885
Foreclosed real estate and repossessed assets		8,867		5,092
Non-performing assets	$	257,170	$	41,196

Estimated gross interest income that would have been recorded if the foregoing nonaccrual loans had remained current in accordance with their contractual terms totaled $44.2 million, $99 thousand, and $164 thousand in 2009, 2008, and 2007, respectively.

Information on impaired loans (in thousands) at December 31, 2009, 2008, and 2007 is as follows.

	2009		2008		2007
Impaired loans for which an allowance has been provided	$	331,532	$	2,161	$	1,698
Impaired loans for which no allowance has been provided		137,536		2,130		—
Total impaired loans	$	469,068	$	4,291	$	1,698
Allowance provided for impaired loans, included in the allowance for loan losses	$	91,488	$	545	$	406
Average balance in impaired loans	$	215,363	$	3,883	$	1,782
Interest income recognized from impaired loans	$	17,440	$	131	$	20

As of December 31, 2009, loans classified as troubled debt restructurings were $73.5 million, all of which are considered impaired and included in the disclosure above. There were no troubled debt restructurings as of December 31, 2008. Upon execution of a forbearance agreement including modified terms, an impaired loan will be re-classified from non-performing to a troubled debt restructuring, but will continue to be identified as impaired until the loan performs under the modified terms for the remainder of the calendar year in which it was restructured but not less than 90 days.

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Transactions affecting the allowance for loan losses (in thousands) for the years ended December 31, 2009, 2008, and 2007 were as follows.

	2009			2008			2007
Balance at beginning of year	$	51,218		$	5,043		$	3,911
Provision for loan losses		134,223			1,418			1,232
Acquired through SFC acquisition		—			2,932			—
Acquired through GFH acquisition		—			42,060			—
Loans charged off		(53,536	)		(337	)		(109	)
Recoveries		792			102			9
Balance at end of year	$	132,697		$	51,218		$	5,043

In the opinion of management, based on conditions reasonably known to them, the allowance was adequate at December 31, 2009. The allowance may be increased or decreased in the future based on loan balances outstanding, changes in internally generated credit quality ratings of the loan portfolio, changes in general economic conditions, or other risk factors.

(5) Accounting for Certain Loans Acquired in a Transfer

ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, requires acquired loans to be recorded at fair value and prohibits carrying over valuation allowances when initially accounting for acquired impaired loans. Loans carried at fair value, mortgage loans held for sale, and loans to borrowers in good standing under revolving credit agreements are excluded from the scope of this pronouncement. It limits the yield that may be accreted to the excess of the undiscounted expected cash flows over the investor’s initial investment in the loan. The excess of the contractual cash flows over expected cash flows may not be recognized as an adjustment of yield. Subsequent increases in cash flows expected to be collected are recognized prospectively through an adjustment of the loan’s yield over its remaining life. Decreases in expected cash flows are recognized as impairments.

The Company acquired loans pursuant to the acquisition of GFH in December 2008. The Company reviewed the loan portfolio at acquisition to determine whether there was evidence of deterioration of credit quality since origination and if it was probable that it will be unable to collect all amounts due according to the loan’s contractual terms. When both conditions existed, the Company accounted for each loan individually, considered expected prepayments, and estimated the amount and timing of discounted expected principal, interest, and other cash flows (expected at acquisition) for each loan. The Company determined the excess of the loan’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted into interest income (non-accretable difference). The remaining amount, representing the excess of the loan’s cash flows expected to be collected over the amount paid, is accreted into interest income over the remaining life of the loan (accretable yield).

Over the life of the loan, the Company continues to estimate cash flows expected to be collected. The Company evaluates at the balance sheet date whether the present value of its loans determined using the effective interest rates has decreased, and if so, the Company establishes a valuation allowance for the loan. Valuation allowances for acquired loans reflect only those losses incurred after acquisition; that is, the present value of cash flows expected at acquisition that are not expected to be collected. Valuation allowances are established only subsequent to our acquisition of the loans. For loans that are not accounted for as debt securities, the present value of any subsequent increase in the loan’s or pool’s actual cash flows or cash flows expected to be collected is used first to reverse any existing valuation allowance for that loan. For any remaining increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over the loan’s remaining life. The Company does not have any such loans that were accounted for as debt securities.

Loans that were acquired in the GFH acquisition for which there was evidence of deterioration of credit quality since origination and for which it was probable that all contractually required payments would not be made as scheduled had an outstanding balance of $88.0 million and a carrying amount of $78.2 million at December 31, 2009. The carrying amount of these loans is included in the balance sheet amount of loans receivable at December 31, 2009. Of these loans, $58.2 million have experienced further deterioration since the acquisition date and are included in the impaired loan amounts disclosed in Note 4. The following table depicts the accretable yield (in thousands) at the beginning and end of the period.

Balance, December 31, 2008	$	4,167
Accretion		(2,134	)
Disposals		(2,075	)
Additions		1,084
Balance, December 31, 2009	$	1,042

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(6) Derivative Instruments

At December 31, 2009, the Company had rate lock commitments to originate mortgage loans in the amount of $17.2 million and loans held for sale of $12.6 million. At December 31, 2008, the Company had rate lock commitments to originate mortgage loans in the amount of $17.1 million and loans held for sale of $5.1 million. The Company entered into corresponding commitments with third party investors to sell loans of approximately $29.8 million in 2009 and $23.6 million in 2008. Under the contractual relationship with these investors, the Company is obligated to sell the loans only if the loans close. No other obligation exists. As a result of these contractual relationships with these investors, the Company is not exposed to losses nor will it realize gains related to its rate lock commitments due to changes in interest rates.

(7) Premises, Equipment, and Leases

Premises and equipment (in thousands) at December 31, 2009 and 2008 are summarized as follows.

	2009			2008
Land	$	31,335		$	26,357
Buildings and improvements		58,177			59,731
Leasehold improvements		3,411			3,224
Equipment, furniture, and fixtures		14,828			15,101
Construction in progress		7			2,768
		107,758			107,181
Less accumulated depreciation and amortization		(10,246	)		(5,846	)
	$	97,512		$	101,335

Depreciation and leasehold amortization expense for the years ended December 31, 2009, 2008, and 2007 was $5.5 million, $1.4 million, and $886 thousand, respectively.

The Company leases land and buildings upon which certain of its operating facilities and financial center facilities are located. These leases expire at various dates through August 31, 2049. Additionally, the Company has the option to purchase the land upon which the building where some of our operations occur at the end of the twenty-year lease term at a cost of $300 thousand.

Various facilities and equipment are leased under noncancellable operating leases with initial remaining terms in excess of one year with options for renewal. In addition to minimum rents, certain leases have escalation clauses and include provisions for additional payments to cover taxes, insurance, and maintenance. The effects of the scheduled rent increases, which are included in the minimum lease payments, are recognized on a straight-line basis over the lease term. Rental expense was $3.8 million for 2009 compared to $1.1 million for 2008 and $907 thousand for 2007.

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Future minimum lease payments (in thousands), by year and in the aggregate, under noncancellable operating leases at December 31, 2009 were as follows.

2010	$	2,963
2011		2,631
2012		2,448
2013		2,383
2014		2,255
Thereafter		18,979
	$	31,659

The Company has entered into contracts as lessor for excess office space. Future minimum lease payments receivable (in thousands) under noncancelable leasing arrangements at December 31, 2009 were as follows.

2010	$	156
2011		94
2012		92
2013		92
2014		31
	$	465

(8) Goodwill and Intangible Assets

Goodwill and other intangible assets with an indefinite life are subject to impairment testing at least annually or more often if events or circumstances suggest potential impairment. Other acquired intangible assets determined to have a finite life are amortized over their estimated useful life in a manner that best reflects the economic benefits of the intangible asset. Intangible assets with a finite life are periodically reviewed for other-than-temporary impairment. ASC 350 identifies a two-step impairment test that should be used to test for impairment and measure the amount of the impairment loss to be recognized. The first step involves comparing the fair value of the reporting unit with the carrying value of the reporting unit. If the carrying value of the reporting unit exceeds fair value of the reporting unit, a potential impairment may exist. The second step compares the implied fair value of the reporting unit’s goodwill to the carrying amount of that goodwill. The excess of the carrying amount over the fair value is an impairment of goodwill.

As of May 31, 2009, the Company, in accordance to ASC 350, conducted an impairment test on the goodwill from the SFC acquisition related to Shore. Management’s review of goodwill indicated an impairment of $27.9 million. Also in the second quarter of 2009, the goodwill associated with the GFH merger was tested for impairment. Our testing indicated that there was no impairment of the goodwill related to the GFH merger as of June 30, 2009. The differing result of the GFH impairment testing from the SFC testing was due to several factors including the relative value of consideration paid for GFH (only five months had elapsed since the GFH merger, and, thus, fair values were more current than for SFC) and the market prices paid in acquisitions had already fallen substantially prior to the GFH acquisition. Annual impairment testing of the GFH goodwill subsequently was conducted on its planned schedule as of October 31, 2009. Due in part to a decline in the Company’s stock price and, thus, its market capitalization, and its further deterioration in the fair value of the Company’s assets, the assessment reflected impairment of the entire $56.9 million in goodwill associated with the GFH acquisition. The non-cash loss on impairment of goodwill was recorded as a noninterest expense in the statement of operations for the year ended December 31, 2009.

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A summary of goodwill and intangible assets (in thousands) as of December 31, 2009 and 2008 is as follows.

	2009				2008
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Intangible assets subject to future amortization:
Core deposit intangible	$	8,105	$	1,703	$	8,105	$	347
Employment contract intangible		1,130		713		1,957		19
Insurance book of business intangible		6,450		430		6,000		—
Total intangible assets subject to future amortization		15,685		2,846		16,062		366
Intangible assets not subject to amortization:
Goodwill		—		—		82,671		—
Total goodwill and intangible assets	$	15,685	$	2,846	$	98,733	$	366

There were no intangible assets as of December 31, 2007.

The aggregate amortization expense for intangible assets with finite lives for the year ended December 31, 2009 was $2.5 million, compared to $366 thousand for 2008; there was no amortization expense for intangible assets in 2007. The estimated aggregate annual amortization expense (in thousands) for the years subsequent to December 31, 2009 is as follows.

2010	$	1,979
2011		1,945
2012		1,765
2013		1,392
2014		1,026
Thereafter		4,732
Total	$	12,839

Changes in the carrying amount of goodwill (in thousands) for the year ended December 31, 2009 are as follows.

Balance, December 31, 2008	$	82,671
Impairment losses		(84,837	)
Adjustments		2,166
Balance, December 31, 2009	$	—

(9) Foreclosed Real Estate and Repossessed Assets

Foreclosed assets are presented net of an allowance for losses. An analysis of the allowance for losses (in thousands) on foreclosed assets is as follows.

	December 31, 2009			December 31, 2008
Balance at beginning of year	$	—		$	—
Provision for losses		1,043			—
Charge-offs		(687	)		—
Balance at end of year	$	356		$	—

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Expenses (in thousands) applicable to foreclosed assets include the following.

	Year Ended
	December 31, 2009
Net loss on sales of real estate	$	161
Provision for losses		1,043
Operating expenses, net of rental income		417
Total	$	1,621

There were no foreclosed asset expenses for the years ended December 31, 2008 and 2007.

(10) Deposits

The scheduled maturities of time deposits (in thousands) at December 31, 2009 and 2008 were as follows.

	2009				2008
	Time Deposits Less than $100		Time Deposits $100 or More		Time Deposits Less than $100		Time Deposits $100 or More
Maturity of:
3 months or less	$	242,970	$	47,514	$	357,126	$	110,968
3 months - 6 months		157,105		49,791		144,912		91,286
6 months - 12 months		286,701		148,037		237,761		117,113
1 year - 2 years		165,255		85,786		67,170		43,298
2 years - 3 years		18,837		13,771		29,209		17,797
3 years - 4 years		8,389		5,951		13,845		10,546
4 years - 5 years		8,936		5,895		7,761		3,528
Over 5 years		1,595		100		1,003		—
	$	889,788	$	356,845	$	858,787	$	394,536

Total brokered deposits were $386.4 million and $484.8 million at December 31, 2009 and 2008, respectively. Of these brokered funds $47.6 million and $245.3 million were interest bearing demand deposits and the remaining $338.8 million and $239.5 million were time deposits at December 31, 2009 and 2008, respectively.

(11) Borrowings

As a member of FHLB, the Company may borrow funds based on criteria established by the FHLB. The FHLB may call these borrowings prior to maturity if the collateral balance falls below the borrowing level. The borrowing arrangements with the FHLB could be either short- or long- term depending on our related costs and needs. At December 31, 2009 and 2008, the Company had loans from the FHLB totaling $228.2 million and $279.1 million, respectively. Interest only is payable on a monthly basis until maturity. The carrying value of maturities of FHLB borrowings at December 31, 2009 was as follows (in thousands).

2010	$	11,685
2011		15,000
2012		196,247
2013		—
2014		5,283
	$	228,215

FHLB borrowings carry a weighted average interest rate of 4.06% and are all convertible at FHLB’s option on the interest payment dates to either one month or three month LIBOR except for five fixed rate advances that total $32.5 million. The FHLB borrowings were collateralized with residential real estate loans, commercial real estate loans, and investment securities. During 2009 two FHLB borrowings were paid off prior to maturity. An

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extinguishment of debt charge in the amount of $2.0 million was incurred in association with these early pay-offs. The principal balance due, excluding acquisition fair value adjustments, of FHLB borrowings in aggregate, were $219.8 million at December 31, 2009.

The Company acquired two reverse repurchase agreements in the GFH acquisition. Each repurchase agreement has an original principal balance of $10.0 million and is collateralized with mortgage-backed securities with a similar fair market value. The first repurchase agreement has a five-year term with an interest rate fixed at 4.99% until it is repurchased by the counterparty on August 1, 2011. The second repurchase agreement has a seven-year term with a repurchase date of August 1, 2013 (the “2013 Agreement”). The interest rate of this agreement is a variable rate of 9.85% minus three-month LIBOR (0.25% at December 31, 2009), not to exceed 5.85%. The applicable interest rate in effect at December 31, 2009 was 5.85%. Both agreements are callable by the counterparty on a quarterly basis and the 2013 Agreement became immediately callable as a result of BOHR not maintaining well-capitalized status with the FDIC. The carrying value of these agreements as of December 31, 2009 was $21.0 million.

As part of the GFH acquisition, the Company acquired four placements of trust preferred securities as follows:

	Amount (in thousands)		Interest Rate		Redeemable On Or After	Mandatory Redemption
Gateway Capital Statutory Trust I	$	8,000	LIBOR + 3.10	%	September 17, 2008	September 17, 2033
Gateway Capital Statutory Trust II		7,000	LIBOR + 2.65	%	July 17, 2009	June 17, 2034
Gateway Capital Statutory Trust III		15,000	LIBOR + 1.50	%	May 30, 2011	May 30, 2036
Gateway Capital Statutory Trust IV		25,000	LIBOR + 1.55	%	July 30, 2012	July 30, 2037

LIBOR in the table above refers to 3 month LIBOR. In all four trusts, the trust issuer has invested the total proceeds from the sale of the trust preferred securities in junior subordinated deferrable interest debentures issued by the Company. The trust preferred securities pay cumulative cash distributions quarterly at an annual rate, reset quarterly. The dividends paid to holders of the trust preferred securities, which are recorded as interest expense, are deductible for income tax purposes. The Company has fully and unconditionally guaranteed the trust preferred securities through the combined operation of the debentures and other related documents. The Company’s obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company. The carrying value of these debentures in aggregate as of December 31, 2009 was $28.3 million. The Company has suspended the payment of dividends on all four issues of trust preferred securities, however, at year-end 2009 all payments had been made in accordance with contractual terms.

The Company borrowed $28.0 million from another bank in 2008. This borrowing had a variable interest rate of prime minus 1% with a floor of 4% (4% at December 31, 2008) and was paid in full during 2009.

(12) Preferred Stock and Warrant

In conjunction with the acquisition of GFH, the Company issued 23,266 shares of Series A Non-Convertible Non-Cumulative Perpetual Preferred Stock (“Series A Preferred Stock”) and 37,550 shares of Series B Non-Convertible Non-Cumulative Perpetual Preferred Stock (“Series B Preferred Stock”). Both series are non-voting except as may otherwise be required under applicable law.

The Series A Preferred Stock has no par value and a liquidation amount equal to $1,000 per share. Dividends are payable quarterly, if declared, at an annual rate of 8.75%, and are non-cumulative. Since January 1, 2009, the Company had the right and option to redeem all or a portion of the Series A Preferred Stock at the rate of $1,000 per share. At December 31, 2009, none of this stock has been redeemed.

The Series B Preferred Stock has no par value and a liquidation amount equal to $1,000 per share. Dividends are payable quarterly, if declared, at a rate of 12%, and are non-cumulative. Since October 1, 2009, the Company had the right and option to redeem all or a portion of the Series B Preferred Stock at the rate of $1,000 per share. At December 31, 2009, none of this stock has been redeemed.

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On December 31, 2008, the Company issued 80,347 shares of Series C Fixed Rate Cumulative Preferred Stock (“Series C Preferred Stock”) to the United States Department of the Treasury (“U.S. Treasury”) for an aggregate price of $80.3 million. The shares were issued in connection with the Company’s participation in the Capital Purchase Program (“CPP”) as authorized under the Emergency Stabilization Act of 2008. The Series C Preferred Stock has no par value and a liquidation amount equal to $1,000 per share. The Series C Preferred Stock pays cumulative dividends at an annual rate of 5% for the first five years and 9% thereafter. This Preferred Stock is redeemable at par plus accrued and unpaid dividends subject to the approval of the Company’s primary regulators.

In addition, the Company issued to the U.S. Treasury a warrant to purchase 1,325,858 shares of the Company’s common stock at an initial exercise price of $9.09 per share. The warrant is immediately exercisable and provides for the adjustment of the exercise price and the number of shares of common stock issuable upon exercise pursuant to customary anti-dilution provisions, such as stock splits or distributions of securities or other assets to holders of common stock and upon certain issuances of common stock at or below a specified price relative to the then-current market price of common stock. The warrant expires ten years from the issuance date. The U.S. Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the warrant.

Shares of the Series A Preferred Stock, the Series B Preferred Stock, and the Series C Preferred Stock have priority over the Company’s common stock with regard to the payment of dividends. As such, the Company may not pay dividends on, or repurchase, redeem, or otherwise acquire for consideration shares of its common stock unless dividends for these classes of Preferred Stock are current.

The Company took actions during the fourth quarter that were intended to preserve capital. On October 30, 2009, we announced that we would suspend dividends on our Series A Preferred Stock and Series B Preferred Stock, which required us to also suspend dividends on our Series C Preferred Stock under applicable law. As a result, on November 17, 2009, we notified the Treasury of our intent to defer the payment of our regulatory quarterly cash dividend on our Series C Preferred Stock issued to the Treasury in connection with our participation in the TARP CPP. If we miss six quarterly dividend payments, whether or not consecutive, the Treasury will have the right to appoint two directors to our board of directors until all accrued but unpaid dividends have been paid. We cannot pay dividends on our outstanding shares of Series C Preferred Stock or our common stock until we have paid in full all deferred distributions on our trust preferred securities. As of December 31, 2009, dividends accrued but not paid for Series C Preferred Stock totaled $1.5 million.

(13) Financial Instruments with Off-Balance-Sheet Risk

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk which have not been recognized in the consolidated balance sheets. The contract amount of these instruments reflects the extent of the Company’s involvement or “credit risk.” The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Contractual amounts (in thousands) at December 31, 2009 and 2008 were as follows.

	2009		2008
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	326,121	$	523,179
Standby letters of credit		8,590		29,030
	$	334,711	$	552,209

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counter party. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, income-producing commercial properties, and real estate.

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Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of the contractual obligation by a customer to a third party. The majority of these guarantees extend until satisfactory completion of the customer’s contractual obligation. Management does not anticipate any material losses will arise from additional funding of the aforementioned commitments or letters of credit.

(14) Retirement Plans

Defined Contribution Plan

The Company has defined contribution 401(k) plans at both of its subsidiary banks and one for the former GFH employees. Under the BOHR 401(k) plan, all employees who are 21 years of age and have completed one year of service are eligible to participate. Participants may contribute up to 20% of their compensation, subject to statutory limitations and the Company matches 100% of the employees’ contributions up to 4% of salary. Under the Shore 401(k) plan, all employees who are 18 years of age and have completed 3 months of service are eligible to participate. Participants may contribute up to 15% of their compensation and the Company matches 100% up to 3% of the employees’ contributions and 50% of the next 3%. Former Gateway Bank employees who are 18 years of age and have completed three months of service are eligible to participate in that 401(k) plan, and the Company matches 100% of the employees’ contributions up to 6% of salary. The Company may also make additional discretionary contributions to the plans. Participants are fully vested in their contributions and the Company’s match immediately and become fully vested in the Company’s discretionary contributions after 3 years of service.

The Company made no discretionary contributions in 2009 compared to $209 thousand and $119 thousand for the years ended December 31, 2008 and 2007, respectively. The Company also made matching contributions of $1.2 million, $257 thousand, and $202 thousand for the years ended December 31, 2009, 2008, and 2007, respectively. The Company offers its stock as an investment option under the BOHR 401(k) plan.

Supplemental Executive Retirement Plans (“SERP”)

The Company has entered into SERPs with several key officers. Under these agreements, all but four of twelve officers are each eligible to receive an annual benefit payable in fifteen installments each equal to $50 thousand following the attainment of their Plan Retirement Date. Two of the other four officers are eligible to receive an annual benefit payable in fifteen installments each equal to 50% of their Benefit Computation Base following the attainment of his Plan Retirement Date. The remaining two officers are eligible to receive an annual benefit payable in fifteen installments each equal to 70% of their Benefit Computation Base following the attainment of their Plan Retirement Date. The Benefit Computation Base is calculated as the average compensation from the Company over the three consecutive completed calendar years just prior to the year of retirement or termination. The Company recognizes expense each year related to these agreements based on the present value of the benefits expected to be provided to the employees and any beneficiaries. The change in benefit obligation and funded status (in thousands) for the years ended December 31, 2009, 2008, and 2007 were as follows.

	2009			2008			2007
Benefit obligation at beginning of year	$	3,915		$	2,153		$	1,650
Acquired in GFH acquisition		—			1,098			—
Service cost		826			516			388
Interest cost		228			148			115
Terminations		(95	)		—			—
Benefit obligation at end of year		4,874			3,915			2,153
Fair value of plan assets		—			—			—
Funded status	$	(4,874	)	$	(3,915	)	$	(2,153	)

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The amount of the funded status is the accrued benefit cost included in other liabilities on the balance sheet. The amounts (in thousands) recognized in the consolidated balance sheets as of December 31, 2009 and 2008 were as follows.

	2009			2008
Accrued benefit cost included in other liabilities	$	(4,874	)	$	(3,915	)

The components of net periodic benefit cost (in thousands) for the years ended December 31, 2009, 2008, and 2007 were as follows.

	2009			2008		2007
Service cost	$	826		$	516	$	388
Interest cost		228			148		115
Terminations		(95	)		—		—
Net periodic benefit cost	$	959		$	664	$	503

The weighted-average assumptions used to determine benefit obligations and net periodic pension benefit at December 31, 2009, 2008, and 2007 were as follows. The rate of compensation increase only applies to the officer agreements with a Benefit Computation Base.

	2009	2008	2007
Discount rate	6.00% - 7.00%	7.00%	7.00%
Rate of compensation increase	3.00% - 5.75%	3.00% - 5.00%	3.00%

The Company recognizes expense each year related to the SERPs based on the present value of the benefits expected to be provided to the employees and any beneficiaries. The Company does not expect to make contributions to fund the supplemental retirement agreements in 2010 and made no contributions to the plan in 2009. The plans are unfunded and there are no plan assets. As of December 31, 2009, the following benefit payments (in thousands) are expected to be paid over the next ten years.

2010	$	359
2011		359
2012		359
2013		359
2014		359
2015 -2019		2,027
	$	3,822

Executive Savings Plan

The Company has an Executive Savings Plan with certain officers whereby an initial contribution made by the officers will be matched each year by the Company as long as the officers’ employment continues and the Company is profitable. Contributions into the plan may be used to purchase employer stock or may be placed in savings accounts for the benefit of each individual participant and earn interest at the highest rate currently being paid on a Company certificate of deposit. Company contributions to the Executive Savings Plan during 2008 and 2007 were $242 thousand and $268 thousand, respectively. No contributions were made to the plan during 2009.

Board of Directors Retirement Agreement

The Company has entered into retirement agreements with certain members of the Board of Directors. Participants are eligible for compensation under the plan upon the sixth anniversary of the participant’s first board meeting. Benefits are to be paid in monthly installments commencing at retirement and ending upon the death, disability, or

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mutual consent of both parties to the agreement. Under the plan, the participants continue to serve the Company after retirement by performing certain duties as outlined in the plan document. During 2009, 2008, and 2007, the Company expensed $72 thousand, $69 thousand, and $63 thousand, respectively, related to this plan.

(15) Stock Compensation Plans

During 2008 and 2007, the Company authorized the grant of options to employees and directors for 18,000 and 34,968 shares, respectively, of the Company’s common stock under stock compensation plans that have been approved by the Company’s shareholders. During 2009, no options were granted. All outstanding options granted have original terms that range from 5 to 10 years and are either fully vested and exercisable at the date of grant or vested ratably over 3 to 10 years. During 2008, the Company acquired 216,183 stock options as part of the Shore Merger and 1,185,018 stock options as part of the Gateway Merger. A summary of the Company’s stock option activity and related information is as follows:

	Options Outstanding		Weighted Average Exercise Price		Average Intrinsic Value
Balance at December 31, 2006	929,970		$	9.19	$	—
Granted	34,968			12.91		—
Exercised	(93,599	)		7.55		—
Forfeited	(10,992	)		12.00		—
Expired	(2,191	)		10.85		—
Balance at December 31, 2007	858,156			9.48		—
Acquired through SFC acquisition	216,183			6.27		—
Acquired through GFH acquisition	1,185,018			14.12		—
Granted	18,000			11.41		—
Exercised	(112,964	)		5.13		—
Forfeited	(2,750	)		12.00		—
Expired	(65,637	)		113.33		—
Balance at December 31, 2008	2,096,006			11.96		—
Exercised	(86,243	)		7.11		—
Forfeited	(20,834	)		11.78		—
Expired	(568,716	)		11.14		—
Balance at December 31, 2009	1,420,213		$	12.60	$	—
Options exercisable at December 31, 2009	1,307,168		$	12.43	$	—

Stock-based compensation expense recognized in the consolidated statements of operations and the options exercised, including the total intrinsic value and cash received, for the years ended December 31, 2009, 2008, and 2007 were as follows.

	2009		2008		2007
Expense recognized:
Related to stock options	$	179,304	$	86,156	$	160,229
Related to share awards		451,228		63,452		177,021
Related tax benefit		164,907		29,014		115,276
Number of options exercised:
New shares		86,243		112,282		76,700
Previously acquired shares		—		682		16,899
Total intrinsic value of options exercised	$	31,533	$	642,619	$	487,004
Cash received from options exercised		613,209		571,222		476,076

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Information pertaining to fully vested options outstanding and exercisable as of December 31, 2009 is as follows.

	Options Outstanding					Options Exercisable
Ranges of Exercise Prices	Number of Options Outstanding	Weighted Average  Remaining Contractual Life		Weighted Average Exercise Price		Number of Options Exercisable	Weighted Average Exercise Price
$    3.09 -   5.05	73,340	$	2.08	$	4.17	73,340	$	4.17
6.53 -   8.84	312,311		2.43		8.04	312,311		8.04
9.11 - 10.65	411,683		3.86		9.75	407,663		9.74
12.00 - 14.33	210,887		6.79		12.20	130,954		12.30
19.43 - 22.07	358,562		5.21		20.05	329,467		19.91
23.60 - 24.67	53,433		5.59		24.22	53,433		24.22
$    3.09 - 24.67	1,420,216	$	4.30	$	12.60	1,307,168	$	12.43

The Company has 786,535 shares available under shareholder approved stock incentive plans. As of December 31, 2009, there was $384 thousand of unrecognized compensation cost related to non-vested stock options. That cost is expected to be recognized over a weighted average period of 3.51 years.

The weighted-average grant-date fair value of stock options granted and acquired through mergers during 2008 and 2007 was $1.86 and $2.34, respectively. The following assumptions were used to arrive at the fair value of stock options:

	2008	2007
Risk-free interest rate	2.25% - 3.34%	4.36% - 4.68%
Volatility	34.30% - 40.56%	18.40% - 27.27%
Dividend yield	3.39% - 5.04%	3.33% - 3.43%
Expected term (in years)	0.10 - 8.30	1.90 - 9.50

Option valuation models require the input of highly subjective assumptions. Because the Company’s employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a representative single measure of the fair value at which transactions may occur. Expected volatility is based on historical volatility of the Company’s traded shares. The expected term is calculated by the lattice option pricing model using assumptions regarding the contractual term of the stock options, vesting periods, the exercise price to market stock price multiple experienced by the Company, and the historical employee exit rate.

The Company has granted non-vested shares to certain directors and employees as part of incentive programs. These non-vested shares have original vesting schedules that range from one to nine years and are expensed over the same schedules.

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A summary of the Company’s non-vested share activity and related information was as follows.

	Number of Shares		Weighted Average Grant Date Fair Value
Balance at December 31, 2006	47,176		$	10.76
Granted	20,364			12.12
Vested	(4,500	)		10.76
Forfeited	(8,500	)		10.98
Balance at December 31, 2007	54,540			11.23
Granted	32,908			8.50
Vested	(37,623	)		11.16
Balance at December 31, 2008	49,825			9.49
Granted	10,000			8.54
Vested	(33,756	)		8.85
Forfeited	(4,152	)		8.97
Balance at December 31, 2009	21,917		$	10.12

As of December 31, 2009, there was $175 thousand of total unrecognized compensation cost related to non-vested share awards. That cost is expected to be recognized over a weighted average period of 3.79 years. The total fair value of shares vested during the years ended December 31, 2009, 2008, and 2007 was $164 thousand, $418 thousand, and $57 thousand, respectively.

(16) Employment Agreements

The Company and its subsidiaries have entered into employment agreements with 26 officers to ensure a stable and competent management base. Two of the agreements expire in 2010, four expire in 2011, eighteen expire in 2012, one expires in 2013, and one expires in 2014. The agreements will automatically renew at the end of their terms unless the officer is notified in writing prior to expiration. Among other things, the agreements provide for severance benefits payable to the officers upon termination of employment following a change of control in the Company.

(17) Dividend Reinvestment and Optional Cash Purchase Plan

In order to raise additional capital, the Company has a Dividend Reinvestment and Optional Cash Purchase Plan. The plan enables shareholders to receive cash payment or reinvest their dividends. In connection with this plan, for the year ended December 31, 2009, the Company entered the open market and acquired 68,748 shares at an average price of $7.72 per share. For the year ended December 31, 2009, the Company did not issue any shares in connection with the dividend reinvestment plan. The stock purchased through the plan directly from the Company is valued at the weighted average sales price of the Company’s common stock in transactions occurring during the 60 calendar days immediately prior to the purchase date. The purchase price of shares purchased on the open market is the current market price of the shares purchased on the applicable purchase dates.

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(18) Noninterest Expense

A summary of noninterest expense (in thousands) for the years ended December 31, 2009, 2008, and 2007 is as follows.

(in thousands)	2009		2008		2007
Salaries and employee benefits	$	42,285	$	11,518	$	9,954
Occupancy		9,044		2,261		1,668
Data processing		5,368		1,189		612
Impairment of goodwill		84,837		—		—
FDIC insurance		5,661		262		42
Equipment		4,735		663		343
Professional fees		2,883		383		279
Amortization of intangible assets		2,546		365		—
Bank franchise tax		1,922		621		464
Telephone and postage		1,599		481		305
Directors’ and regional board fees		1,020		443		307
Stationery, printing, and office supplies		894		229		168
Advertising and marketing		888		412		326
ATM and VISA check card		293		551		500
Other		6,820		1,609		1,026
Total noninterest expenses	$	170,795	$	20,987	$	15,994

(19) Business Segment Reporting

The Company has two community banks, BOHR and Shore, which provide loan and deposit services throughout their 60 locations in Virginia, North Carolina, and Maryland. In addition to its banking operations, the Company has three other reportable segments: Mortgage, Investment, and Insurance. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Net income (loss) below is shown prior to corporate overhead allocation. Intersegment transactions are recorded at cost and eliminated as part of the consolidated process. Because of the interrelationships between the segments, the information is not indicative of how the segments would perform if they operated as independent entities. The following table shows certain financial information (in thousands) at December 31, 2009 for each segment and in total.

	Total			Elimination			Banking			Mortgage		Investment		Insurance
Total assets at December 31, 2009	$	2,975,558		$	(303,100	)	$	3,253,492		$	13,599	$	1,163	$	10,404
Year ended December 31, 2009
Net interest income	$	105,151		$	—		$	104,745		$	392	$	—	$	14
Provision for loan losses		(134,223	)		—			(134,223	)		—		—		—
Net interest income after provision for loan losses		(29,072	)		—			(29,478	)		392		—		14
Noninterest income		22,325			—			12,428			4,642		354		4,901
Noninterest expense		170,795			—			162,304			3,686		183		4,622
Net income before income taxes		(177,542	)		—			(179,354	)		1,348		171		293
Income tax expense (benefit)		(32,075	)		—			(32,683	)		445		60		103
Net income (loss)	$	(145,467	)	$	—		$	(146,671	)	$	903	$	111	$	190

The Company had no reportable business segments at December 31, 2008 and 2007.

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(20) Restrictions on Loans and Dividends from Subsidiaries

Regulatory agencies place certain restrictions on dividends paid and loans or advances made by the Banks to the Company. The amount of dividends the Banks may pay to the Company, without prior approval, is limited to current year earnings plus retained net profits for the two preceding years. Under these restrictions, at December 31, 2009, the Banks had no ability to pay dividends without prior approval.

Loans and advances from the Banks to the Company are limited based on regulatory capital. As of December 31, 2009, the aggregate principal balances of loans outstanding from BOHR and Shore to the Company were $21.5 million and $2.0 million, respectively. The loans from BOHR to the Company were not adequately secured with collateral under applicable regulations.

(21) Regulatory Capital Requirements

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company (on a consolidated basis) and the Banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. The Company’s and the Banks’ capital amounts and classification are subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

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A summary of the Company’s and the Banks’ required and actual capital components (in thousands) follows.

	Actual				For Capital Adequacy Purposes				To Be Well-Capitalized Under Prompt Action Provisions
	Amount		Ratio		Amount		Ratio		Amount	Ratio
As of December 31, 2009
Tier 1 Capital:
Consolidated Company	$	160,485	6.80	%	$	94,395	4.00	%	N/A	N/A
Bank of Hampton Roads		162,508	7.43	%		87,480	4.00	%	131,220	6.00	%
Shore Bank		21,668	11.13	%		7,789	4.00	%	11,684	6.00	%
Total Risk-Based Capital:
Consolidated Company		191,257	8.10	%		188,789	8.00	%	N/A	N/A
Bank of Hampton Roads		191,098	8.74	%		174,960	8.00	%	218,700	10.00	%
Shore Bank		24,121	12.39	%		15,578	8.00	%	19,473	10.00	%
Leverage Ratio:
Consolidated Company		160,485	5.32	%		123,660	4.00	%	N/A	N/A
Bank of Hampton Roads		162,508	5.92	%		113,551	4.00	%	141,939	5.00	%
Shore Bank		21,668	7.13	%		12,151	4.00	%	15,189	5.00	%
As of December 31, 2008
Tier 1 Capital:
Consolidated Company	$	265,468	9.89	%	$	107,386	4.00	%	N/A	N/A
Bank of Hampton Roads		70,499	12.43	%		22,690	4.00	%	34,035	6.00	%
Shore Bank		24,483	11.42	%		8,578	4.00	%	12,867	6.00	%
Gateway Bank1		169,321	8.79	%		77,076	4.00	%	115,614	6.00	%
Total Risk-Based Capital:
Consolidated Company		299,235	11.15	%		214,772	8.00	%	N/A	N/A
Bank of Hampton Roads		76,931	13.56	%		45,380	8.00	%	56,725	10.00	%
Shore Bank		27,164	12.67	%		17,156	8.00	%	21,445	10.00	%
Gateway Bank1		193,629	10.05	%		154,152	8.00	%	192,690	10.00	%
Leverage Ratio:
Consolidated Company		265,468	32.06	%		33,120	4.00	%	N/A	N/A
Bank of Hampton Roads		70,499	11.77	%		23,953	4.00	%	29,942	5.00	%
Shore Bank		24,483	8.44	%		11,607	4.00	%	14,508	5.00	%
Gateway Bank1		169,321	8.04	%		84,281	4.00	%	105,351	5.00	%
1         Gateway Bank was merged into BOHR in May 2009.

The regulatory risk-based capital guidelines to which we are subject measure capital relative to risk-weighted assets and off-balance sheet financial instruments. Tier I capital is comprised of shareholders’ equity, net of unrealized gains or losses on available-for-sale securities, less intangible assets, while total risk-based capital adds certain debt instruments and qualifying allowances for loan losses.

Because our total risk-based capital ratio was below 10% as of December 31, 2009, we are considered to be only “adequately capitalized” under the regulatory framework for prompt corrective action. Similarly, BOHR is considered to be “adequately capitalized” under applicable regulations. Section 29 of the Federal Deposit Insurance Act limits the use of brokered deposits by institutions that are less than “well-capitalized” and allows the FDIC to place restrictions on interest rates that institutions may pay. As of December 31, 2009, Shore Bank was “well-capitalized.”

On May 29, 2009, the FDIC approved a final rule to implement new interest rate restrictions on institutions that are not “well-capitalized.” The rule, which became effective on January 1, 2010, limits the interest rate paid by such institutions to 75 basis points above a national rate, as derived from the interest rate average of all institutions. On

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December 4, 2009, the FDIC issued a Financial Institution Letter, FIL-69-2009, which requires institutions that are not well-capitalized to request a determination from the FDIC whether they are operating in an area where rates paid on deposits are higher than the national rate. The Financial Institution Letter allows the institutions that submit determination requests by December 31, 2009 to follow the national rate for local customers by March 1, 2010, if determined not to be operating in a high rate area. Regardless of the determination, institutions must use the national rate caps to determine conformance for all deposits outside the market area beginning January 1, 2010.

Although there can be no assurance that we will be successful, the Board and management will make their utmost efforts to raise sufficient capital to regain “well-capitalized” status at all levels, and we are continuing to explore options for raising additional capital.

(22) Fair Value of Assets and Liabilities

ASC 820, Fair Value Measurements and Disclosures, establishes a framework for measuring fair value. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also permits the measurement of transactions between market participants at the measurement date and the measurement of selected eligible financial instruments at fair value at specified election dates.

The Company groups our financial assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The majority of instruments fall into the Level 1 or 2 fair value hierarchy. Valuation methodologies for the fair value hierarchy are as follows:

Level 1 –	Quoted market prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.
Level 2 –	Observable inputs other than Level 1 prices, such as quoted prices for similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
Level 3 –	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques as well as instruments for which the determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

ASC 820 requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate that value. ASC 820 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying fair value of the Company. The following methods and assumptions were used by the Company in estimating fair value for its financial instruments, as defined by ASC 820:

(a) Cash and Cash Equivalents

Cash and cash equivalents include cash and due from banks, overnight funds sold, and interest-bearing deposits in other banks. The carrying amount approximates fair value.

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(b) Investment Securities Available-for-Sale

Fair values are based on published market prices where available. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Investment securities available-for-sale are carried at their aggregate fair value.

(c) Loans Held For Sale

The carrying value of loans held for sale is a reasonable estimate of fair value since the loans are expected to be sold within a short period.

(d) Loans

The fair value of loans is estimated by discounting the future cash flows using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

(e) Interest Receivable and Interest Payable

The carrying amount approximates fair value.

(f) Bank Owned Life Insurance

The carrying amount approximates fair value.

(g) Deposits

The fair values disclosed for demand deposits (for example, interest and noninterest demand and savings accounts) are, by definition, equal to the amount payable on demand at the reporting date (this is, their carrying values). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits.

(h) Borrowings

The fair value of borrowings is estimated using discounted cash flow analysis based on the rates currently offered for borrowings of similar remaining maturities and collateral requirements. These include other borrowings, overnight funds purchased, and FHLB borrowings.

(i) Commitments to Extend Credit and Standby Letters of Credit

The only amounts recorded for commitments to extend credit and standby letters of credit are the deferred fees arising from these unrecognized financial instruments. These deferred fees are not deemed significant at December 31, 2009 and 2008, and as such, the related fair values have not been estimated.

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The estimated fair value (in thousands) of the Company’s financial instruments required to be disclosed under ASC 825, Financial Instruments, at December 31, 2009 and 2008 were as follows.

	2009				2008
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets:
Cash and due from banks	$	16,995	$	16,995	$	42,827	$	42,827
Overnight funds sold and due from FRB		139,228		139,228		510		510
Interest-bearing deposits in other banks		43,821		43,821		4,975		4,975
Investment securities available-for-sale		161,062		161,062		149,637		149,637
Loans held for sale		12,615		12,615		5,064		5,064
Loans, net		2,293,995		2,364,702		2,548,308		2,550,018
Interest receivable		8,788		8,788		12,272		12,272
Bank owned life insurance		48,354		48,354		46,603		46,603
Liabilities:
Deposits		2,495,040		2,486,449		2,296,146		2,299,179
FHLB borrowings		228,215		233,356		279,065		282,005
Other borrowings		49,254		50,316		77,223		77,223
Overnight funds purchased		—		—		73,300		73,300
Interest payable		3,572		3,572		5,814		5,814

Recurring Basis

The Company measures or monitors certain of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis for those assets and liabilities that were elected as well as for certain assets and liabilities in which fair value is the primary basis of accounting. The following table reflects the fair value (in thousands) of assets and liabilities measured and recognized at fair value on a recurring basis in the consolidated balance sheet.

	December 31, 2009
	Assets  /Liabilities Measured at Fair Value		Fair Value Measurements Using
			Level 1		Level 2		Level 3
Investment securities available-for-sale	$	161,062	$	1,357	$	158,477	$	1,228
Derivative loan commitments		201		—		—		201
Loans held for sale		12,615		—		12,615		—
	December 31, 2008
	Assets /Liabilities Measured at Fair Value		Fair Value Measurements Using
			Level 1		Level 2		Level 3
Investment securities available-for-sale	$	149,637	$	6,080	$	142,387	$	1,170
Derivative loan commitments		173		—		—		173
Loans held for sale		5,064		—		5,064		—

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	Fair Value Measurements Using Significant Unobservable Inputs (Level 3 measurements only)
	Investment Securities Available-for-Sale			Derivative Loan Commitments
Balance at December 31, 2008	$	1,170		$	173
Unrealized losses included in:
Earnings		(304	)		—
Other comprehensive loss		(190	)		—
Purchases, issuances, and settlements, net		—			28
Transfers in and/or out of Level 3, net		552			—
Balance at December 31, 2009	$	1,228		$	201

The following describe the valuation techniques used to measure fair value for our assets and liabilities classified as recurring.

Investment Securities Available-for-Sale. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products, and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions, and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Derivative Loan Commitments. The Company enters into commitments to originate mortgage loans whereby the interest rate is fixed prior to funding. These commitments, in which the Company intends to sell in the secondary market, are considered freestanding derivatives. These are carried at fair value and are included in other assets at December 31, 2009 and 2008.

Loans held for sale. The Company sells loans to outside investors. Fair value of mortgage loans held for sale is estimated based on the commitments into which individual loans will be delivered. As of December 31, 2009, mortgage loans held for sale had a net carrying value of approximately $12.6 million which approximated its fair value. On December 31, 2008, mortgage loans held for sale had a net carrying value of approximately $5.1 million which approximated its fair value.

Nonrecurring Basis

Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment.) The adjustments are based on appraisals of underlying collateral or other observable market prices when current appraisals or observable market prices are available. Where we do not have a current appraisal, an existing appraisal or other valuation would be utilized after discounting it to reflect current market conditions, and, as such, may include significant management assumptions and input with respect of the determination of fair value.

To assist in the discounting process, a valuation matrix was developed to provide valuation guidance for collateral dependent loans and foreclosed real estate where it was deemed that an existing appraisal was outdated as to current market conditions. The matrix is situated on both a temporal and collateral type axis in an attempt to compensate for value fluctuations within the respective asset classes situated in the captured time period. The matrix applies discounts to external appraisals depending on the type of real estate and age of the appraisal. The discounts are generally specific point estimates; however in some cases, the matrix allows for a small range of values. To address the changing economic conditions prevalent during 2009, the discounts were based in part upon externally derived data including but not limited to Case-Shiller composite indices, Moody’s REAL

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Commercial Property Prices Indices, and information from Zillow.com. The discounts were also based upon management’s knowledge of market conditions and prices of sales of foreclosed real estate. In addition, matrix value adjustments may be made by our independent appraisal group to reflect property value trends within specific markets as well as actual sales data from market transactions and/or foreclosed real estate sales. In the case where an appraisal is greater than two years old for collateral dependent impaired loans and foreclosed real estate, it is the Company’s policy to classify these as Level 3 within the fair value hierarchy. The following table presents the carrying amount (in thousands) for impaired loans and adjustments made to fair value during the respective reporting periods.

	Assets Measured at Fair Value		Fair Value Measurements at December 31, 2009 Using
			Level 1		Level 2		Level 3		Total Losses
Impaired loans	$	240,044	$	—	$	149,346	$	90,698	$	—
	Assets Measured  at Fair Value		Fair Value Measurements at December 31, 2008 Using
			Level 1		Level 2		Level 3		Total Losses
Impaired loans	$	1,616	$	—	$	1,616	$	—	$	—

Our nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on a nonrecurring basis relate to foreclosed real estate and repossessed assets and goodwill. The amounts below represent the carrying values (in thousands) for our foreclosed real estate and repossessed assets and goodwill and impairment adjustments made to fair value during the respective reporting periods.

	Assets Measured at Fair Value		Fair Value Measurements at December 31, 2009 Using
			Level 1		Level 2		Level 3		Total Losses
Foreclosed real estate and repossessed assets	$	8,867	$	—	$	8,867	$	—	$	1,043
Goodwill		—		—		—		—		84,837
	Assets Measured at Fair Value		Fair Value Measurements at December 31, 2008 Using
			Level 1		Level 2		Level 3		Total Losses
Foreclosed real estate and repossessed assets	$	5,092	$	—	$	5,092	$	—	$	—
Goodwill		82,671						82,671		—

The following describe the valuation techniques used to measure fair value for our nonfinancial assets and liabilities classified as nonrecurring.

Foreclosed Real Estate and Repossessed Assets. The adjustments to foreclosed real estate and repossessed assets are based primarily on appraisals of the real estate or other observable market prices. Our policy is that fair values for these assets are based on current appraisals. In most cases, we maintain current appraisals for these items. Where we do not have a current appraisal, an existing appraisal would be utilized after discounting it to reflect current market conditions, and, as such, may include significant management assumptions and input with respect to the determination of fair value. As described above, we utilize a valuation matrix to assist in this process.

Goodwill. The adjustments to goodwill are made in accordance with FASB ASC 320-20-35 and FASB ASC 320-20-35-30 in which the prescribed two-step impairment testing was performed on goodwill arising from mergers with SFC and GFH.

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(23) Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction and the states of Virginia, Maryland, and North Carolina. With few exceptions, the Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years prior to 2006. The current and deferred components of income tax expense (in thousands) for the years ended December 31, 2009, 2008, and 2007 were as follows.

	2009			2008			2007
Current	$	(9,043	)	$	4,496		$	4,158
Deferred		(23,032	)		(836	)		(568	)
Income tax expense (benefit)	$	(32,075	)	$	3,660		$	3,590

The provisions for income taxes for the years ended December 31, 2009, 2008, and 2007 differ from the amount computed by applying the statutory federal income tax rate to income before taxes due to the following (in thousands).

	2009			2008			2007
Federal income tax expense (benefit), at statutory rate	$	(62,140	)	$	3,709		$	3,555
Decrease resulting from:
State income tax, net of federal benefit		(1,217	)		—			—
Valuation allowance of deferred tax assets		1,032			—			—
Rate change		517			—			—
Dividends and tax-exempt interest		(198	)		(77	)		—
Goodwill impairment		29,693			—			—
Officers’ life insurance		(505	)		(24	)		11
Other		743			52			24
Income tax expense (benefit)	$	(32,075	)	$	3,660		$	3,590

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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities (in thousands) as of December 31, 2009 and 2008 were as follows.

	2009			2008
Deferred tax assets:
Allowance for loan losses	$	52,510		$	22,804
Federal net operating loss carryforward		10,325			—
State net operating loss carryforward		769
AMT carryforward		502			—
Impairment of securities and other assets		1,210			14,567
Unrealized loss on securities available-for-sale		397			—
Nonaccrual loan interest		4,658			183
Accrued expenses		1,314			501
Nonqualified deferred compensation		3,135			2,925
Other		443			15
Total deferred tax assets before valuation allowance		75,263			40,995
Valuation allowance		(1,032	)		—
Total deferred tax assets		74,231			40,995
Deferred tax liabilities:
Prepaid expenses		881			328
Deferred loan costs		1,019			1,027
Fair value adjustment to net assets acquired in business combinations		13,148			4,257
Unrealized gain on securities available-for-sale		—			335
Depreciation		2,654			2,087
Other		149			345
Total deferred tax liabilities		17,851			8,379
Net deferred tax assets	$	56,380		$	32,616

At December 31, 2009, the Company had net operating loss carryforwards for federal income tax purposes of $29.5 million, which are available to offset future federal taxable income, if any, through 2029. In addition, the Company has alternative minimum tax credit carryforwards of approximately $502 thousand, which are available to reduce federal regular income taxes, if any, over an indefinite period. Since we expect to become a regular tax payer after our net operating losses are fully utilized, we expect to be able to utilize this AMT carryforward.

A valuation allowance was established in 2009 related to capital losses realized. Since capital losses are only deductible for income tax purposes to the extent the Company has capital gains, a valuation allowance of $1.0 million has been established against the $2.8 million in capital loss carryforwards.

In addition to a net operating loss carryforward, our net deferred tax asset consisted primarily of two asset components offset by one liability component: (1) At December 31, 2009, the timing differences related to the allowance for loan losses was $142.2 million, resulting in a deferred tax asset of approximately $52.5 million. (2) Interest income related to non-performing loans (referred to as “lost interest”) is recognized as taxable income for tax purposes, but is not recorded as income for book purposes. Lost interest was approximately $12.6 million at December 31, 2009, resulting in a deferred tax asset of approximately $4.6 million. (3) The aggregate deferred tax effect of all purchase accounting entries related to the acquisitions of GFH and Shore resulted in a net deferred tax liability of approximately $13.1 million at December 31, 2009.

76

In assessing the realizability of the deferred tax asset and in accordance with ASC 740-10-30-17, management considered both positive and negative evidence when determining whether it was more likely than not that some portion or all of the gross deferred tax asset would not be realized. We considered all available evidence and reviewed relevant sources of taxable income within the carryforward and carryback periods. Those sources included: (1) future reversals of existing taxable temporary differences (ASC 740-10-30-18(a)); (2) future taxable income, exclusive of reserving temporary differences and carryforwards (ASC 740-10-30-18(b)); and (3) taxable income in prior carryback year(s) if carryback is permitted under the tax laws (ASC 740-10-30-18(c)). Under applicable accounting rules and guidance, we determined that the tax benefit would more likely than not be realized, and consequently, that a further valuation allowance was not necessary.

Approximately 50% of our 2009 pre-tax operating loss is attributable to non-recurring items such as the write-off of goodwill associated with the SFC and GFH transactions, as well as other identified non-recurring expenses. The majority of the loss creating the deferred tax asset associated with net operating loss carryforwards is characterized as ordinary. In considering the positive and negative factors affecting the likelihood of being able to utilize the deferred tax asset, we have, as noted above, placed reliance on past and future taxable income. In order to utilize our entire net deferred tax asset of $56.4 million, the Company would need to generate approximately $150 to $160 million of future taxable income over the 20 year carryforward period. This translates to approximately $8.0 million per year. The Company earned between $5.5 million and $7.2 million each year in the previous four years. In addition, we note that a portion of the deferred tax asset will be recovered as problem assets are recognized as losses, which will be deductible for income tax purposes. We also took into account expanded time available as certain tax assets such as the allowance for loan losses transfers to a net operating loss carryforward. Further, we have considered limited prudent and feasible tax-planning strategies, such as, sale-leaseback of certain branches/buildings and divestiture of separately chartered banking subsidiary, that are available to accelerate taxable income. Negative factors we have considered include a projected loss in 2010 (which, on a quarterly basis, reduces over the year) and potential negative consequences related to regulatory capital and liquidity issues.

In summary, we believe the positive evidence of (i) only one year of a loss, which includes a large amount of non-recurring type expenses and write-offs, (ii) ordinary income treatment for substantially all the deferred tax assets, (iii) a long carryforward period (20 years), (iv) taxes paid available for carryback, and (v) the reversal of existing deferred tax liabilities offset the negative evidence of (i) additional operating losses in 2010 and (ii) regulatory capital and liquidity issues that may have reputational consequences. Accordingly, except for the $1.0 million valuation allowance associated with capital loss carryforwards, we believe it is more likely than not we will realize our recognized gross deferred tax assets and a valuation allowance will not be required.

ASC 740 provides a comprehensive model for how the Company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on its tax return. The Company recognizes interest and penalties related to unrecognized tax benefits as part of the tax provision. The Company recognized minimal amounts in penalties and fees for the years ended December 31, 2009 and 2008. The Company has no uncertain tax positions at December 31, 2009.

77

(24) Condensed Parent Company Only Financial Statements

The condensed financial position as of December 31, 2009 and 2008, and the condensed results of operations and cash flows for each of the years in the three-year period ended December 31, 2009, of Hampton Roads Bankshares, Inc., parent company only, are presented below (in thousands).

Condensed Balance Sheets

	2009			2008
Assets:
Cash on deposit with subsidiaries	$	4,414		$	55,605
Equity securities available-for-sale		1,871			5,104
Investment in subsidiaries		234,124			372,703
Deferred tax assets, net		—			529
Other assets		5,678			3,677
Total assets	$	246,087		$	437,618
Liabilities:
Borrowings	$	51,747		$	78,646
Deferred tax liability		9,910			—
Other liabilities		3,434			14,163
Total liabilities		65,091			92,809
Shareholders’ equity:
Preferred stock		134,970			133,542
Common stock		13,846			13,611
Capital surplus		165,391			171,284
Retained earnings (deficit)		(132,466	)		26,482
Accumulated other comprehensive loss		(745	)		(110	)
Total shareholders’ equity		180,996			344,809
Total liabilities and shareholders’ equity	$	246,087		$	437,618

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Condensed Statements of Operations

	2009			2008		2007
Income:
Dividends from subsidiaries	$	1,750		$	7,429	$	4,420
Interest income		186			668		—
Other-than-temporary impairment of securities		(2,469	)		—		—
Other income		71			58		—
Total income (loss)		(462	)		8,155		4,420
Expenses:
Interest expense		4,151			891		—
Other expense		1,606			637		280
Total expense		5,757			1,528		280
Income (loss) before income taxes and equity in undistributed earnings of subsidiaries		(6,219	)		6,627		4,140
Income tax expense		2,697			275		96
Equity in undistributed earnings (loss) of subsidiaries		(141,945	)		273		2,575
Net income (loss)		(145,467	)		7,175		6,811
Preferred stock dividends and accretion of discount		8,689			—		—
Net income (loss) available to common shareholders	$	(154,156	)	$	7,175	$	6,811

79

Condensed Statements of Cash Flows

	2009			2008			2007
Operating Activities:
Net income (loss)	$	(145,467	)	$	7,175		$	6,811
Adjustments:
Equity in undistributed (earnings) loss of subsidiaries		141,945			(273	)		(2,575	)
Amortization of intangibles		2,529			—			—
Stock-based compensation expense		630			149			337
Board fees		164			110			24
Other-than-temporary impairment		2,469			427			—
Change in other assets		(3,704	)		33			648
Change in other liabilities		(12,236	)		3,240			(1	)
Net cash provided by (used in) operating activities		(13,670	)		10,861			5,244
Investing Activities:
Purchase of equity securities available-for-sale		—			(1,006	)		—
Proceeds from sales of equity securities		976			—			—
Net decrease (increase) in loans		429			(429	)		—
Investment in subsidiaries		—			(36,000	)		(788	)
Investment in affiliates		—			—			210
Net cash provided by (used in) investing activities		1,405			(37,435	)		(578	)
Financing Activities:
Net increase (decrease) in borrowings		(28,000	)		20,529			—
Issuance of shares in private placement		306			—			—
Common stock repurchased		(544	)		(1,446	)		(2,877	)
Common dividends paid, net		(4,261	)		(2,936	)		(2,166	)
Preferred dividends paid and amortization of preferred stock discount		(7,182	)		—			—
Cash exchanged in mergers		—			(16,076	)		—
Issuance of Series C preferred stock and warrant		—			80,347			—
Excess tax benefit realized from stock options exercised		142			20			118
Proceeds from exercise of stock options		613			572			476
Issuance of shares to 401(k) plan		—			—			137
Issuance of shares to executive savings plan		—			121			146
Net cash provided by (used in) financing activities		(38,926	)		81,131			(4,166	)
Increase (decrease) in cash and cash equivalents		(51,191	)		54,557			500
Cash and cash equivalents at beginning of year		55,605			1,048			548
Cash and cash equivalents at end of year	$	4,414		$	55,605		$	1,048

(25) Related Party Transactions

The Company had a 19% interest in Tidewater Home Funding, LLC (“THF”), which was sold in 2009. The Company accounted for this investment under the equity method. BOHR had a warehouse credit facility for THF for up to $10,000,000. As of December 31, 2008, THF had drawn $3.6 million on this warehouse line of credit, at a variable rate of 7.25%.

80

Loans are made to the Company’s executive officers and directors and their associates during the ordinary course of business. In management’s opinion, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with other persons and do not involve more than normal risk of collectability or present other unfavorable features. At December 31, 2009 and 2008, loans to executive officers, directors, and their associates amounted to $90.9 million and $88.3 million, respectively. During 2009, additional loans and repayments of loans by executive officers, directors, and their associates were $65.1 million and $62.5 million, respectively. As of December 31, 2009, $7.5 million of loans made to insiders for the purpose of acquiring the Company’s stock was deducted from the Company’s loans and shareholders’ equity.

Deposits are taken from the Company’s executive officers and directors and their associates during the ordinary course of business. In management’s opinion, these deposits are taken on substantially the same terms, including interest rates, as those prevailing at the time for comparable deposits from other persons. At December 31, 2009 and 2008, deposits from executive officers, directors, and their associates amounted to $38.8 million and $16.0 million, respectively.

The Company leases one of its Nags Head and one of its Kitty Hawk branches from a director and his wife for monthly payments of $8,000 and $17,096, respectively. The term of the Nags Head lease was recently renewed for five years commencing August 2009. Kitty Hawk is a land lease which commenced in April 2006 for a term of twenty years, with three five-year renewals.

One of the Company’s directors is the managing member of two limited liability companies that serve as the managers for the legal entities which own and manage the Dominion Tower at 999 Waterside Drive, Norfolk, Virginia 23510. The Company leases the second floor and a portion of the nineteenth floor of the Dominion Tower for its executive offices and a portion of the first floor as a financial center. The lease expires in September 2016, with one renewal option for a period of seven years. Rent payments made in 2009, 2008, and 2007 totaled $724 thousand, $625 thousand, and $583 thousand, respectively.

The Company leases from a director the land on which one of its Eastern Shore branches is located for monthly payments of $2,006. The terms of this lease were recently renewed for five years commencing June 2009 with one additional five-year renewal.

BOHR and Shore had loans outstanding to the Company with balances of $21.5 million and $2.0 million, respectively, as of December 31, 2009. The loan from BOHR was inadequately secured in violation of Regulation W promulgated to the Federal Reserve.

81

(26) Quarterly Financial Data (Unaudited)

Summarized unaudited quarterly financial data (in thousands) for the years ended December 31, 2009 and 2008 is as follows.

	2009
	Fourth			Third			Second			First
Interest income	$	34,798		$	37,388		$	37,728		$	39,531
Interest expense		8,097			10,911			11,829			13,457
Net interest income		26,701			26,477			25,899			26,074
Provision for loan losses		65,666			33,662			33,706			1,189
Noninterest income		2,998			7,232			5,655			6,440
Noninterest expense		78,911			21,706			50,330			19,848
Income (loss) before provision for income taxes		(114,878	)		(21,659	)		(52,482	)		11,477
Provision for income taxes (benefit)		(18,650	)		(8,282	)		(9,253	)		4,110
Net income (loss)		(96,228	)		(13,377	)		(43,229	)		7,367
Preferred stock dividend and accretion of discount		1,370			1,360			2,995			2,964
Net income (loss) available to common shareholders	$	(97,598	)	$	(14,737	)	$	(46,224	)	$	4,403
Basic earnings (loss) per share	$	(4.45	)	$	(0.68	)	$	(2.13	)	$	0.20
Diluted earnings (loss) per share	$	(4.45	)	$	(0.68	)	$	(2.13	)	$	0.20
	2008
	Fourth			Third			Second			First
Interest income	$	13,610		$	12,370		$	9,793		$	9,404
Interest expense		5,039			4,848			4,012			4,018
Net interest income		8,571			7,522			5,781			5,386
Provision for loan losses		594			280			274			270
Noninterest income		1,264			1,801			1,694			1,221
Noninterest expense		5,671			6,541			4,659			4,116
Income before provision for income taxes		3,570			2,502			2,542			2,221
Provision for income taxes		1,225			806			869			760
Net income	$	2,345		$	1,696		$	1,673		$	1,461
Basic earnings per share	$	0.18		$	0.13		$	0.15		$	0.14
Diluted earnings per share	$	0.18		$	0.13		$	0.15		$	0.14

(27) Subsequent Events

82

Deferral of Trust Preferred Dividends. In January 2010, the Company exercised its right to defer all quarterly distributions on the trust preferred securities it assumed in connection with its merger with GFH, which are identified immediately below (collectively, the “Trust Preferred Securities”).

	Amount (in thousands)	Interest Rate		Redeemable on or After	Mandatory Redemption
Gateway Capital Statutory Trust I	8,000	LIBOR + 3.10	%	September 17, 2008	September 17, 2033
Gateway Capital Statutory Trust II	7,000	LIBOR + 2.65	%	July 17, 2009	June 17, 2034
Gateway Capital Statutory Trust III	15,000	LIBOR + 1.50	%	May 30, 2011	May 30, 2036
Gateway Capital Statutory Trust IV	25,000	LIBOR + 1.55	%	July 30, 2012	July 30, 2037

On April 9, 2010, the Company exercised its right to continue the deferral of such quarterly distributions. Interest payable under the Trust Preferred Securities continues to accrue during the deferral period and interest on the deferred interest also accrues, both of which must be paid at the end of the deferral period. Prior to the expiration of the deferral period, the Company has the right to further defer interest payments, provided that no deferral period, together with all prior deferrals, exceeds 20 consecutive quarters and that no event of default (as defined by the terms of the applicable Trust Preferred Securities) has occurred and is continuing at the time of the deferral. The Company was not in default with respect to the terms of the Trust Preferred Securities at the time the quarterly payments were deferred and such deferrals did not cause an event of default under the terms of the Trust Preferred Securities.

On April 1, 2010, the Company received a non-compliance notice from the NASDAQ Stock Market stating that because the Company did not timely file its Annual Report on Form 10-K for the period ended December 31, 2009, it is no longer in compliance with the rules for continued listing, including Rule 5250(c)(l). NASDAQ Marketplace Rule 5250(c)(l) requires the Company to file with NASDAQ, on a timely basis, all reports and other documents required to be filed with the Securities and Exchange Commission. The Company believes that it will regain compliance with NASDAQ’s listing rules upon the filing of this Form 10-K and will seek confirmation from NASDAQ accordingly.

83

EX-21.1

Exhibit 21.1

Subsidiaries of the Registrant

Bank of Hampton Roads, a Virginia corporation, is a wholly-owned subsidiary of Hampton Roads Bankshares, Inc.

(1) Bank of Hampton Roads Service Corporation, a Virginia corporation, is a wholly-owned subsidiary of Bank of Hampton Roads.

(2) Gateway Insurance Services, Inc, a North Carolina corporation, is a wholly-owned subsidiary of Bank of Hampton Roads.

(i) Insurance Express Premium Finance, a North Carolina corporation, is a wholly-owned subsidiary of Gateway Insurance Services, Inc.

(3) Gateway Investment Services, Inc, a North Carolina corporation, is a wholly-owned subsidiary of Bank of Hampton Roads.

(4) Gateway Bank Mortgage, Inc, a North Carolina corporation, is a wholly-owned subsidiary of Bank of Hampton Roads.

(5) Gateway Title Agency, Inc, a North Carolina corporation, is a wholly-owned subsidiary of Bank of Hampton Roads.

(i) Gateway Title Agency, Inc. owns a 40% interest in Lake James Title Co., LLC, which was organized in Virginia.

Shore Bank, a Virginia corporation, is a wholly-owned subsidiary of Hampton Roads Bankshares, Inc.

(1) Shore Investments Service Corporation (Shore Investments Inc.), a Virginia corporation, is a wholly-owned subsidiary of Shore Bank.

(i) Shore Investments, Inc. owns a 6% interest in Bankers Title, LLC, which was organized in Virginia.

Hampton Roads Investments, Inc., a Virginia corporation, is a wholly-owned subsidiary of Hampton Roads Bankshares, Inc.

Hampton Roads Bankshares, Inc. owns a 9% interest in Davenport Financial Fund, LLC, which was organized in Virginia.

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements (No. 333-162584, No. 333-160337, No. 333-157029 and No. 333-84304) on Form S-3 and (No. 333-64346, No. 333-134583, No. 333-139968, and No. 333-159104) on Form S-8 of Hampton Roads Bankshares, Inc. and subsidiaries of our reports dated April 22, 2010, relating to our audits of the consolidated financial statements and internal control over financial reporting, which appear in the Annual Report to shareholders, included in and incorporated by reference in the Annual Report on Form 10-K of Hampton Roads Bankshares Inc. for the year ended December 31, 2009.

Our report dated April 22, 2010, on the effectiveness of internal control over financial reporting as of December 31, 2009, expressed an opinion that Hampton Roads Bankshares, Inc. had not maintained effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Winchester, Virginia

April 22, 2010

EX-31.1

Exhibit 31.1

Certifications under Section 302 of the Sarbanes-Oxley Act of 2002

I, John A. B. Davies, Jr., Chief Executive Officer, certify that:

1. I have reviewed this Annual Report on Form 10-K of Hampton Roads Bankshares, Inc. for the period ended December 31, 2009;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 23, 2010	/s/ John A. B. Davies, Jr.
	John A. B. Davies, Jr.
	Chief Executive Officer

EX-31.2

Exhibit 31.2

Certifications under Section 302 of the Sarbanes-Oxley Act of 2002

I, Neal A. Petrovich, Chief Financial Officer, certify that:

1. I have reviewed this Annual Report on Form 10-K of Hampton Roads Bankshares, Inc. for the period ended December 31, 2009;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 23, 2010	/s/ Neal A. Petrovich
	Neal A. Petrovich
	Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification under Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report on Form 10-K of Hampton Roads Bankshares, Inc. (the “Company”) for the period ended December 31, 2009 to be filed with the Securities and Exchange Commission (“Report”), we, John A. B. Davies, Jr., Chief Executive Officer, and Neal A. Petrovich, Chief Financial Officer, hereby certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:

(a) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(b) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John A. B. Davies, Jr.

John A. B. Davies, Jr.

Chief Executive Officer

Date: April 23, 2010

/s/ Neal A. Petrovich

Neal A. Petrovich

Chief Financial Officer

Date: April 23, 2010

EX-99.1

Exhibit 99.1

TARP FIRST FISCAL YEAR-END CERTIFICATION

UST Sequence Number 236

I, John A. B. Davies, Jr., certify, based on my knowledge, that:

(i) In fiscal year 2009, the compensation committee of Hampton Roads Bankshares, Inc. (the “Company”) discussed, reviewed, and evaluated with senior risk officers, the senior executive officer (“SEO”) compensation plans and the employee compensation plans and the risks these plans pose to the Company;

(ii) The compensation committee of the Company has identified and limited during the applicable period any features of the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of the Company, and during that same applicable period has identified any features of the employee compensation plans that pose risks to the Company and has limited those features to ensure that the Company is not unnecessarily exposed to risks;

(iii) In fiscal year 2009, the compensation committee reviewed the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of the Company to enhance the compensation of an employee and has limited any such features;

(iv) The compensation committee of the Company will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above;

(v) The compensation committee of the Company will provide a narrative description of how it limited during any part of the most recently completed fiscal year that included a TARP period the features in:

(A) SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of the Company;

(B) Employee compensation plans that unnecessarily expose the Company to risks; and

(C) Employee compensation plans that could encourage the manipulation of reported earnings of the Company to enhance the compensation of an employee;

(vi) The Company has required that bonus payments, as defined in the regulations and guidance established under section 111 of EESA (“bonus payments”), of the SEOs and twenty next most highly compensated employees be subject to a recovery or “clawback” provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;

(vii) The Company has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to a SEO or any of the next five most highly compensated employees during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date;

(viii) The Company has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date;

(ix) The board of directors of the Company has established an excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, by the later of September 14, 2009, or ninety days after the closing date of the agreement between the TARP recipient and Treasury; this policy has been provided to Treasury and its primary regulatory agency; the Company and its employees have complied with this policy during the applicable period; and any expenses that, pursuant to this policy, required approval of the board of directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility were properly approved;

(x) The Company will permit a non-binding shareholder resolution in compliance with any applicable federal securities rules and regulations on the disclosures provided under the federal securities laws related to SEO compensation paid or accrued during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date;

(xi) The Company will disclose the amount, nature, and justification for the offering during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for any employee who is subject to the bonus payment limitations identified in paragraph (viii);

(xii) The Company will disclose whether the Company, the board of directors of the Company, or the compensation committee of the Company has engaged during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date, a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period;

(xiii) The Company has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date;

(xiv) The Company has substantially complied with all other requirements related to employee compensation that are provided in the agreement between the Company and Treasury, including any amendments;

(xv) The Company has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year and the most recently completed fiscal year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and most highly compensated employee identified; and

(xvi) I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both.

Date: March 31, 2010	/s/ John A. B. Davies, Jr.
	John A. B. Davies, Jr.
	Chief Executive Officer

EX-99.2

Exhibit 99.2

UST Sequence Number 236

I, Neal A. Petrovich, certify, based on my knowledge, that:

(i) In fiscal year 2009, the compensation committee of Hampton Roads Bankshares, Inc. (the “Company”) discussed, reviewed, and evaluated with senior risk officers, the senior executive officer (“SEO”) compensation plans and the employee compensation plans and the risks these plans pose to the Company;

(ii) The compensation committee of the Company has identified and limited during the applicable period any features of the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of the Company, and during that same applicable period has identified any features of the employee compensation plans that pose risks to the Company and has limited those features to ensure that the Company is not unnecessarily exposed to risks;

(iii) In fiscal year 2009, the compensation committee reviewed the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of the Company to enhance the compensation of an employee and has limited any such features;

(iv) The compensation committee of the Company will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above;

(v) The compensation committee of the Company will provide a narrative description of how it limited during any part of the most recently completed fiscal year that included a TARP period the features in:

(A) SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of the Company;

(B) Employee compensation plans that unnecessarily expose the Company to risks; and

(C) Employee compensation plans that could encourage the manipulation of reported earnings of the Company to enhance the compensation of an employee;

(vi) The Company has required that bonus payments, as defined in the regulations and guidance established under section 111 of EESA (“bonus payments”), of the SEOs and twenty next most highly compensated employees be subject to a recovery or “clawback” provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;

(vii) The Company has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to a SEO or any of the next five most highly compensated employees during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date;

(viii) The Company has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date;

(ix) The board of directors of the Company has established an excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, by the later of September 14, 2009, or ninety days after the closing date of the agreement between the TARP recipient and Treasury; this policy has been provided to Treasury and its primary regulatory agency; the Company and its employees have complied with this policy during the applicable period; and any expenses that, pursuant to this policy, required approval of the board of directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility were properly approved;

(x) The Company will permit a non-binding shareholder resolution in compliance with any applicable federal securities rules and regulations on the disclosures provided under the federal securities laws related to SEO compensation paid or accrued during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date;

(xi) The Company will disclose the amount, nature, and justification for the offering during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for any employee who is subject to the bonus payment limitations identified in paragraph (viii);

(xii) The Company will disclose whether the Company, the board of directors of the Company, or the compensation committee of the Company has engaged during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date, a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period;

(xiii) The Company has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date;

(xiv) The Company has substantially complied with all other requirements related to employee compensation that are provided in the agreement between the Company and Treasury, including any amendments;

(xv) The Company has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year and the most recently completed fiscal year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and most highly compensated employee identified; and

(xvi) I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both.

Date: March 31, 2010	/s/ Neal A. Petrovich
	Neal A. Petrovich
	Chief Financial Officer